Question 1

The effective rate on a $20,000 installment loan with quarterly payments and $2,000 in interest for two years is approximately ______.

Accepted Answer

The effective interest rate can be calculated using the formula for the annual percentage rate (APR) on an installment loan. Given the total interest of $2,000 on a $20,000 loan over two years, the effective rate is approximately 8.9%.

Question 2

The effective rate on a loan with a 7% stated rate and 15% compensating balance is approximately ______.

Accepted Answer

To calculate the effective rate with a compensating balance, we need to first calculate the amount of funds that will be held in the account to satisfy the compensating balance requirement.

For example, if we take out a $10,000 loan with a 15% compensating balance, we need to keep 15% of the loan amount ($1,500) in a deposit account. This means we only receive $8,500 in loan proceeds.

Next, we need to calculate the interest paid on the full amount of the loan ($10,000) at the stated rate (7%).

Interest = $10,000 x 7% = $700

Finally, we divide the total interest paid by the net amount of the loan proceeds ($700/$8,500) to get the effective rate:

Effective rate = 8.2%

Therefore, the best choice is C.

Question 3

Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank gives the firm a stated rate of 10% interest.
What is the effective rate of interest if the loan is a discounted loan with a 10% compensating balance?

Accepted Answer

The answer of Ohlin, Meade, and Assoc. plans to borrow...

Question 4

Which of the following is NOT a reason why a company may choose to pledge accounts receivable?

Accepted Answer

The answer of Which of the following is NOT a...

Question 5

Slipshod Machine Tool Co. owes $55,000 to one of its suppliers. The supplier has offered a trade discount of 2/10, net 30. Slipshod can borrow the funds from either of two banks: First City Bank will loan the funds for 20 days at a cost of $500; Upstart Bank offers a discounted loan for 20 days at a cost of $375.
a) What is the cost of failing to take the discount?
b) What is the effective interest rate on each of the loans?
c) Should Slipshod take the cash discount?
d) Which bank loan should Slipshod use?

Accepted Answer

The answer of Slipshod Machine Tool Co. owes $55,000 to...

Question 6

Which of the following is NOT a benefit of commercial paper to a corporation?

Accepted Answer

Commercial paper is a short-term unsecured loan issued by corporations, and its risk level is not inherently lower than other forms of financing. The risk associated with commercial paper is dependent on the issuer's credit rating and market conditions, not the financial instrument itself.

Question 7

Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank gives the firm a stated rate of 10% interest.
What is the effective rate of interest if the bank uses a discounted loan?

Accepted Answer

The answer of Ohlin, Meade, and Assoc. plans to borrow...

Question 8

Which of the following is NOT evident during a credit crunch?

Accepted Answer

During a credit crunch, interest rates are likely to increase, not decrease. The other options (A, B, and D) are all typical signs of a credit crunch.

Question 9

Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank gives the firm a stated rate of 10% interest.
What is the effective rate of interest if the loan is an installment loan with 12 payments?

Accepted Answer

The answer of Ohlin, Meade, and Assoc. plans to borrow...

Question 10

Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank gives the firm a stated rate of 10% interest.
What is the effective rate of interest if the loan carries a simple 10% interest with a 20% compensating balance?

Accepted Answer

The answer of Ohlin, Meade, and Assoc. plans to borrow...

Question 11

The Magic Pumpkin Limousine Company wants to purchase a car entertainment system for one of its automobiles. The entertainment system vendor has offered to finance the $2,000 purchase over one year in 12 installments, with a total of $200 in interest to be paid on the loan. Magic Pumpkin's bank has offered to finance the purchase with an installment loan, where $155 in interest will be repaid and payments on the loan must be made quarterly. What are the effective interest rates on these loans? Which loan should they select?

Accepted Answer

The answer of The Magic Pumpkin Limousine Company wants to...

Question 12

If a firm has invested in corporate bonds, it may engage in a financial futures contract in order to protect itself from

Accepted Answer

If the firm has invested in corporate bonds and interest rates rise, the value of the bonds will decrease. By entering into a financial futures contract to sell interest rate futures, the firm can protect itself from potential losses due to rising interest rates.

Question 13

Firms exposed to the risk of interest rate changes may reduce that risk by

Accepted Answer

Hedging in the financial futures market is the best choice for reducing the risk of interest rate changes as it allows firms to lock in a future interest rate and protect themselves from potential losses due to rate fluctuations. Obtaining a Eurodollar loan or pledging/factoring accounts receivable may not necessarily provide sufficient protection from interest rate risk, and hedging in the commodities market is not relevant to interest rate risk.

Question 14

Brand Advertising is offered a 3/10, net 40 trade discount by its supplier. In the past, Brand has been able to get away with paying for supplies on credit in 60 days. Since it doesn't have money on hand to take advantage of the discount, it tries to negotiate a loan with Portland State Bank. The amount of $400,000 with a 12% compensating balance and a $6,200 interest charge has been negotiated for the month of May. Brand already maintains a $16,250 balance at the bank. Compute the effective rate of interest on the loan, and the cost of not taking the discount. Should Brand take advantage of the cash discount?

Accepted Answer

The answer of Brand Advertising is offered a 3/10, net...

Question 15

Business Book Publishing needs to borrow $800,000 in order to finance its new inventory. Two banks they were considering offered different annual loan terms: Marine Bank offered a 7% loan with a 15% compensating balance to be paid back in quarterly payments. McLean National Bank offered Business Book Publishing an 8.25% loan to be paid back semi-annually. Which loan terms should Business Book Publishing take?

Accepted Answer

The answer of Business Book Publishing needs to borrow $800,000...

Question 16

In order to finance a shipment of badminton sets, Rujisawa Import-Export is seeking a $700,000 one-year bank loan. The Marine Bank requires that Rujisawa maintain a 25% compensating balance and requires four quarterly payments. The Lincoln Bank requires only a 15% compensating balance, but requires 12 monthly payments. In addition, Lincoln discounts the loan. Both banks state that their interest rate is 8%.
a) Which bank has the lowest effective interest rate?
(NOTE: Deduct the compensating balances from the principal in determining the effective rate.)
b) If Lincoln Bank eliminated its compensating-balance requirement, would your answer change?

Accepted Answer

The answer of In order to finance a shipment of...

Question 17

Hedging refers to

Accepted Answer

Hedging refers to taking a position in the market that reduces the risk of adverse price movements in an asset. It is a transaction aimed at protecting an investment from potential losses by taking an offsetting position in a related security or derivative. Hedging is a common strategy used by investors to manage risk and lower the impact of price fluctuations in their portfolio.

Question 18

The "financial futures market"

Accepted Answer

The financial futures market allows for the delivery of financial instruments at a future point in time. It does not necessarily have to be a physical place or location, and it may not be specifically tailored towards small investors. Option A is incorrect because it is too specific and may not encompass all financial futures markets. Option C is incorrect because it overstates the importance of financial futures markets to small investors. Option D is partially correct but is not the best answer because it includes the incorrect statement from option A.

Question 19

If you borrow $15,000 at $1,000 interest for one year, what is your effective interest cost for the following payment plans?
Semiannual payments.

Accepted Answer

The answer of If you borrow $15,000 at $1,000 interest...

Question 20

If you borrow $15,000 at $1,000 interest for one year, what is your effective interest cost for the following payment plans?
Quarterly payments.

Accepted Answer

The answer of If you borrow $15,000 at $1,000 interest...

Quiz 8: Sources of Short-Term Financing

The effective rate on a $20,000 installment loan with quarterly payments and $2,000 in interest for two years is approximately ______.

The effective rate on a loan with a 7% stated rate and 15% compensating balance is approximately ______.

Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank gives the firm a stated rate of 10% interest. What is the effective rate of interest if the loan is a discounted loan with a 10% compensating balance?

Which of the following is NOT a reason why a company may choose to pledge accounts receivable?

Which of the following is NOT a benefit of commercial paper to a corporation?

Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank gives the firm a stated rate of 10% interest. What is the effective rate of interest if the bank uses a discounted loan?

Which of the following is NOT evident during a credit crunch?

Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank gives the firm a stated rate of 10% interest. What is the effective rate of interest if the loan is an installment loan with 12 payments?

Ohlin, Meade, and Assoc. plans to borrow $1,500,000 for 12 months. Citibank gives the firm a stated rate of 10% interest. What is the effective rate of interest if the loan carries a simple 10% interest with a 20% compensating balance?

If a firm has invested in corporate bonds, it may engage in a financial futures contract in order to protect itself from

Firms exposed to the risk of interest rate changes may reduce that risk by

Hedging refers to

The "financial futures market"

If you borrow $15,000 at $1,000 interest for one year, what is your effective interest cost for the following payment plans? Semiannual payments.

If you borrow $15,000 at $1,000 interest for one year, what is your effective interest cost for the following payment plans? Quarterly payments.