Question 1

Which of the following terms of trade credit is the least expensive?​
A) 2/10, n30​
B) ​3/15, n45
C) ​3/10, n45
D) ​1/10, n45

Accepted Answer

The answer of Which of the following terms of trade...

Question 2

One method to increase the effective cost of a loan is to discount the interest in advance. l> ​

Accepted Answer

Discounting the interest in advance means that the borrower is paying the interest upfront, reducing the amount of the loan that is initially provided. This ultimately increases the effective cost of the loan.

Question 3

Commercial paper is issued by​
A) all firms​
B) ​large firms with excellent credit ratings
C) ​the federal government
D) ​small firms with excellent credit ratings

Accepted Answer

Commercial paper is typically issued by large firms with excellent credit ratings as a way to raise short-term funds for operational needs. It is considered a low-risk investment because the issuing firms are financially strong with a proven track record of creditworthiness.

Question 4

The effective cost of credit depends upon
1) the amount of time the borrower has the use of the funds
2) the stated rate of interest
3) the proceeds the borrower may use​
A)1 and 2​
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Accepted Answer

The effective cost of credit is influenced by the duration for which the borrower has access to the funds, the stated interest rate, and the actual amount of proceeds the borrower can use. These factors collectively determine the true cost of borrowing.

Question 5

Blanket inventory loans are illustrations of unsecured short‑term credit.​

Accepted Answer

Blanket inventory loans are secured short-term credit, where inventory is used as collateral.

Question 6

The cost of trade credit will decrease if​
A) ​the discount is larger
B) ​the discount is smaller
C) ​the length of time decreases
D) ​the firm increases its inventory

Accepted Answer

The answer of The cost of trade credit will decrease...

Question 7

The cost of commercial paper (i.e., the interest rate)​
A) increases as the paper's price increases​
B) ​decreases as the paper's price increases
C) ​increases as the paper sells for a premium
D) ​decreases as the paper sells for a discount

Accepted Answer

The cost of commercial paper, or the interest rate, decreases as the paper's price increases because the interest payment is fixed, so a higher price means a lower yield to the buyer.

Question 8

It is not wise to use a line of credit to finance the acquisition of plant.​

Accepted Answer

Using a line of credit to finance the acquisition of plant could result in high interest rates and increased debt burden, potentially leading to difficulties in repaying the loan. It is advisable to seek alternative forms of financing such as loans, leasing, or equity investment.

Question 9

Commercial banks offer lines of credit, which​
A) ​are the cheapest sources of long term loans
B) ​permit firms to borrow short term funds only as needed
C) ​are the cheapest sources of short term funds
D) ​are available only to firms

Accepted Answer

Lines of credit permit firms to borrow short term funds only as needed. They are not necessarily the cheapest source of funds, but they are flexible and offer convenience to firms in managing their cash flow.

Question 10

Which of the following may not be used to secure a​ short term loan?
A) inventory​
B) ​accounts receivable
C) ​equipment
D) ​retained earnings

Accepted Answer

Retained earnings are profits that have been reinvested back into the business and are not a tangible asset that can be used as collateral for a loan. Therefore, they cannot be used to secure a short term loan. The other options, inventory, accounts receivable, and equipment, are tangible assets that can be used as collateral for a loan.

Question 11

3/10, n60 implies 1. a 3% discount if paid in 60 days 2. a 3% discount if paid in 10 day 3. payment must be made by the 60th day​
A) 1 and 2​
B) ​1 and 3
C) ​2 and 3
D) ​1, 2, and 3

Accepted Answer

The notation "3/10, n60" means that a 3% discount is available if the invoice is paid within 10 days; otherwise, the net (full) amount is due within 60 days. This means option 2 (a 3% discount if paid in 10 days) and option 3 (payment must be made by the 60th day) are correct.

Question 12

One means by which a commercial bank may increase the effective cost of a loan is to
1) require an origination fee
2) have the loan paid off in one lump at maturity
3) have the loan discounted in advance​
A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Accepted Answer

Requiring an origination fee (Choice 1) is a common way for banks to increase the effective cost of a loan, as it is an upfront cost that is not included in the interest rate. Discounting the loan in advance (Choice 3) also increases the effective cost of the loan as it reduces the amount of money the borrower ultimately receives. Having the loan paid off in one lump at maturity (Choice 2) does not necessarily increase the effective cost of the loan, as it is a standard loan term. Therefore, the best choice is B, as it includes the two options that increase the effective cost of the loan.

Question 13

The prime rate is
1) the rate banks charge their customers
2) the rate banks charge theirbest customers
3) generally less than the rate on Treasury bills
4) generally greater than the rate on Treasury bills​
A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Accepted Answer

The prime rate is the interest rate that commercial banks charge their most creditworthy customers, generally large corporations. It is often used as a benchmark in lending rates and is usually higher than the rate on Treasury bills, reflecting the risk premium over the virtually risk-free government securities.

Question 14

A firm cannot sell its accounts receivable at a premium to raise funds.​

Accepted Answer

Accounts receivable are sold at a discount, not a premium.

Question 15

Commercial paper is primarily sold in small denominations of less than $10,000.​

Accepted Answer

Commercial paper is typically issued in denominations of $100,000 or more, making it more accessible to institutional investors rather than individual investors.

Question 16

2/10, n30 implies​
A) ​a 10% discount if the bill is paid in 30 days
B) ​a 2% discount if the bill is paid in 30 days
C) ​a 10% discount if the bill is paid in 10 days
D) ​a 2% discount if the bill is paid in 10 days

Accepted Answer

The notation "2/10, n30" means that a 2% discount is offered if the bill is paid within 10 days; otherwise, the net (full) amount is due in 30 days.

Question 17

Factoring is selling​
A) accounts payable​
B) ​accounts receivable
C) ​notes payable
D) ​inventory

Accepted Answer

Factoring involves selling accounts receivable to a third party (a factor) at a discount in exchange for immediate cash. The factor then assumes the responsibility of collecting payment from the debtor.

Question 18

Secured loans imply​
A) ​specific liabilities support the loan
B) ​the firm has excessive debt financing
C) ​the firm is using only long term debt financing
D) ​an asset is pledged to support the loan

Accepted Answer

Secured loans are backed by an asset that is pledged as collateral to support the loan. This ensures that the lender has a means of recovering their funds if the borrower defaults on the loan.

Question 19

An origination fee​
A) ​increases the yield on a loan to the bank
B) ​increases the amount of money the firm may borrow
C) ​reduces the cost of a loan to the borrower
D) ​increases the discount on commercial paper

Accepted Answer

An origination fee is a fee charged by lenders to process a loan application. It is typically a percentage of the loan amount, and it is added to the borrower's loan balance. This fee increases the yield on a loan to the bank or lender, as it is a source of additional revenue for them. This is because even though the borrower may pay the fee upfront, it effectively increases the total amount that they will have to repay over the life of the loan. Therefore, the origination fee is an additional cost to the borrower, and it does not reduce the cost of the loan. Additionally, it does not increase the amount of money the firm may borrow, nor does it increase the discount on commercial paper.

Question 20

To determine the effective cost of a loan, the borrower needs to know​
A) the use of the proceeds​
B) ​the prime rate
C) ​the length (or term) on the loan
D) ​the margin requirement

Accepted Answer

The effective cost of a loan is determined by considering the interest rate, fees, and other charges over the entire term of the loan. Therefore, the length or term of the loan is a crucial factor in determining the effective cost. The use of proceeds, prime rate, and margin requirement may also impact the cost of the loan, but they are not the only factors to be considered.

Quiz 26: Management of Short-Term Liabilities

Which of the following terms of trade credit is the least expensive?

One method to increase the effective cost of a loan is to discount the interest in advance. l>

Commercial paper is issued by

The effective cost of credit depends upon 1) the amount of time the borrower has the use of the funds 2) the stated rate of interest 3) the proceeds the borrower may use

Blanket inventory loans are illustrations of unsecured short‑term credit.

The cost of trade credit will decrease if

The cost of commercial paper (i.e., the interest rate)

It is not wise to use a line of credit to finance the acquisition of plant.

Commercial banks offer lines of credit, which

Which of the following may not be used to secure a short term loan?

3/10, n60 implies 1. a 3% discount if paid in 60 days 2. a 3% discount if paid in 10 day 3. payment must be made by the 60th day

One means by which a commercial bank may increase the effective cost of a loan is to 1) require an origination fee 2) have the loan paid off in one lump at maturity 3) have the loan discounted in advance

The prime rate is 1) the rate banks charge their customers 2) the rate banks charge theirbest customers 3) generally less than the rate on Treasury bills 4) generally greater than the rate on Treasury bills

A firm cannot sell its accounts receivable at a premium to raise funds.

Commercial paper is primarily sold in small denominations of less than $10,000.

2/10, n30 implies

Factoring is selling

Secured loans imply

An origination fee

To determine the effective cost of a loan, the borrower needs to know

Quiz 26: Management of Short-Term Liabilities

Which of the following terms of trade credit is the least expensive?​

One method to increase the effective cost of a loan is to discount the interest in advance. l> ​

Commercial paper is issued by​

The effective cost of credit depends upon 1) the amount of time the borrower has the use of the funds 2) the stated rate of interest 3) the proceeds the borrower may use​

Blanket inventory loans are illustrations of unsecured short‑term credit.​

The cost of trade credit will decrease if​

The cost of commercial paper (i.e., the interest rate) ​

It is not wise to use a line of credit to finance the acquisition of plant.​

Commercial banks offer lines of credit, which​

Which of the following may not be used to secure a​ short term loan?

3/10, n60 implies 1. a 3% discount if paid in 60 days 2. a 3% discount if paid in 10 day 3. payment must be made by the 60th day​

One means by which a commercial bank may increase the effective cost of a loan is to 1) require an origination fee 2) have the loan paid off in one lump at maturity 3) have the loan discounted in advance​

The prime rate is 1) the rate banks charge their customers 2) the rate banks charge theirbest customers 3) generally less than the rate on Treasury bills 4) generally greater than the rate on Treasury bills​