Question 1

A bank charge on any part of a loan that has not been fully drawn down by a company is called a/an:
A) establishment fee.
B) commitment fee.
C) line fee.
D) service fee.

Accepted Answer

A commitment fee is typically charged by a bank on unused portions of a loan as a compensation for the bank's commitment to lend money to the borrower for a specific period of time. The fee is usually a percentage of the unused portion of the loan and is charged whether or not the borrower actually uses the funds. The other options (A, C, and D) are different types of bank fees associated with loans but do not specifically apply to unused portions of a loan.

Question 2

A company can borrow from a bank at a margin to the bank's base rate.According to the text,all of the following factors affect this margin except:
A) the credit risk of the company.
B) the term of the loan.
C) the term structure of interest rates.
D) the loan repayment schedule.

Accepted Answer

The term structure of interest rates does not affect the margin a company would have to pay for borrowing from a bank. Factors that do affect the margin include the credit risk of the company, the term of the loan, and the loan repayment schedule.

Question 3

Long-term debt can be categorised as financing with an initial maturity:
A) over 180 days and less than a year.
B) between 1 and 3 years.
C) over 1 year.
D) between 3 and 12 years.

Accepted Answer

Long-term debt is defined as any debt with a maturity of over one year. Therefore, option C is the correct answer. The other options are incorrect because they either include short-term debt or have a narrower range of maturities that do not capture all long-term debt.

Question 4

Which of the following rates serves as a reference interest rate in Australia?
A) BBSW
B) LIBOR
C) USCP
D) SIBOR

Accepted Answer

BBSW (Bank Bill Swap Rate) is a benchmark interest rate used in the Australian financial markets. It represents the average interest rate at which banks in Australia borrow money from each other. LIBOR (London Interbank Offered Rate) is a reference interest rate for international lending, USCP (US Commercial Paper) is a short-term debt instrument issued by corporations in the US, and SIBOR (Singapore Interbank Offered Rate) is a benchmark interest rate used in Singapore's financial markets. Therefore, A - BBSW serves as a reference interest rate in Australia.

Question 5

Term loans where each periodic loan payment consists of interest payments and then the principal is repaid in full at maturity are:
A) fully drawn advances.
B) amortised loans.
C) interest-only loans.
D) credit foncier loans.

Accepted Answer

Interest-only loans are structured so that the borrower pays only the interest on the principal balance, with the principal balance unchanged, and then repays the principal amount in full at the end of the loan term.

Question 6

Compared with an amortised loan,a deferred repayment loan involves:
A) periodic interest and principal repayments.
B) periodic interest and principal repayments when positive cash flows begin.
C) periodic interest payments and principal repaid at maturity.
D) periodic principal payments and interest repaid at maturity.

Accepted Answer

A deferred repayment loan differs from an amortised loan in that the repayments do not begin immediately. Instead, the borrower defers repayment until a later date, usually when they expect to have positive cash flows. This means that the borrower will usually only make periodic interest payments until the deferred repayment period ends, at which point they will begin making periodic principal and interest repayments as with an amortised loan. Therefore, choice B is the correct answer.

Question 7

In relation to long-term financing,a fully drawn advance is a:
A) a bank loan advanced for a precise period for an unspecified purpose.
B) A term loan where the full amount is provided at the start of the loan, usually for a specified purpose.
C) A term loan where the borrower has the option of putting its operating account in deficit up to an agreed limit.
D) A term loan where the bank does not pay out the loan until after a specified period.

Accepted Answer

A fully drawn advance is a term loan where the full amount of the loan is provided at the start of the loan, usually for a specified purpose. This means that the borrower receives the entire loan amount upfront and then makes repayments over the term of the loan. Therefore, option (B) is the correct choice. Options (A), (C), and (D) do not accurately describe a fully drawn advance.

Question 8

All of the following affect interest rates charged on term loans except:
A) default risk.
B) the maturity.
C) the repayment schedule.
D) refinancing risk.

Accepted Answer

Refinancing risk is not a direct factor affecting the interest rates charged on term loans. Interest rates are typically influenced by default risk, maturity, and repayment schedule.

Question 9

Which of the following statements best describes a fully amortised term loan?
A) A fully amortised term loan is an interest-only loan with principal repayable at maturity.
B) A fully amortised term loan has periodic repayments, including interest and principal reduction.
C) Interest repayments on a fully amortised term loan are fixed for the period of the loan.
D) A fully amortised term loan is a 'low-start' loan whose repayments are increased over the term.

Accepted Answer

A fully amortised term loan requires periodic repayments that consist of both interest and principal reduction. This means that the loan is fully paid off by the end of the term, unlike an interest-only loan. In contrast to a “low-start” loan, the periodic repayments for a fully amortised term loan remain steady throughout the term of the loan.

Question 10

If a company wished to structure its financing so it repaid funds borrowed only when a project begins to have positive cash flows,it would choose a/an:
A) fully drawn advance.
B) term loan.
C) interest-only loan.
D) deferred payment loan.

Accepted Answer

A deferred payment loan would allow the company to delay repayment until the project begins to generate positive cash flows. This would provide flexibility for the company to avoid repayment until it is financially feasible.

Question 11

________ granted by banks generally have maturities of three to 15 years and are often made to finance capital expenditure such as building construction and the purchase of real estate.
A) Debentures
B) Mortgage bonds
C) Term loans
D) Capital leases

Accepted Answer

Term loans are usually granted by banks to finance long-term capital expenditures such as building construction and real estate purchase. They have maturities ranging from 3 to 15 years, and repayments are made in installments, either monthly or quarterly.

Question 12

If the interest rates on shorter term-to-maturity deposits are higher than those of longer term deposits,it is likely that the costs for the longer term financing for a company are:
A) higher.
B) lower.
C) the same.
D) not related.

Accepted Answer

When interest rates on shorter-term deposits are higher than those on longer-term deposits, it typically indicates an inverted yield curve. In such scenarios, longer-term financing costs are generally lower because the interest rates applied to longer-term borrowings are less than those for short-term borrowings.

Question 13

In relation to long-term financing,an amortised loan involves:
A) periodic payments principal and interest repaid at maturity.
B) periodic interest and principal repayments when positive cash flows begin.
C) periodic interest payments and principal repaid at maturity.
D) periodic equal repayments of interest and principal throughout the term.

Accepted Answer

An amortized loan involves periodic equal repayments that cover both interest and principal throughout the term of the loan, ensuring that the loan is fully paid off by the end of the term.

Question 14

The fees charged by banks onto the total amount of the loan facility and are normally payable in advance are:
A) commitment fees.
B) establishment fees.
C) line fees.
D) service fees.

Accepted Answer

The answer of The fees charged by banks onto the...

Question 15

The fees that represent bank costs in considering loan applications and document preparation are called:
A) commitment fees.
B) establishment fees.
C) line fees.
D) service fees.

Accepted Answer

Establishment fees represent the bank's costs for considering loan applications and document preparation. Commitment fees are charged by the bank for reserving credit funds for a customer. Line fees are charged to maintain a credit line, while service fees are charged for specific services provided by the bank.

Question 16

Banks usually charge a/an _______ for any portion of a term loan that has not been drawn down.
A) establishment fee
B) service fee
C) commitment fee
D) term fee

Accepted Answer

A commitment fee is a charge that a bank levies in order to compensate itself for the revenue it foregoes by holding a sum of money in reserve for a client. The charge is based on the unused portion of a term loan that has been committed to but not yet borrowed. Therefore, option C, which refers to a commitment fee, is the best option.

Question 17

One of the advantages of a prime rate set by a financial institution is that it is less likely to be affected by:
A) changes in the bank bill swap rate.
B) short-term market illiquidity.
C) short-term credit fluctuations.
D) all of the given answers.

Accepted Answer

Prime rate set by a financial institution is based on their own internal lending policies and is less likely to be affected by short-term credit fluctuations. However, it is still possible for the prime rate to be affected by changes in the bank bill swap rate or short-term market illiquidity. Therefore, options A and B are not entirely correct. Choice D, which states all three options, is incorrect as it is not an accurate statement.

Question 18

A term loan is:
A) a bill issued to finance a specific trade transaction.
B) a bill issued to raise funds for general purposes.
C) a flexible funding arrangement for companies.
D) when funds are borrowed for a set period.

Accepted Answer

A term loan is a type of loan where funds are borrowed for a set period, typically with a fixed repayment schedule. It is commonly used for larger purchases or investments, such as equipment or real estate. Option A refers to a trade finance instrument called a bill of exchange, while Option B refers to a more general financing tool such as a bond or promissory note. Option C refers to a flexible line of credit, which is a different type of financing arrangement.

Question 19

If a company wishes to finance a printing press with a five-year life,it would be advisable to finance it with a/an:
A) overdraft.
B) bank bill.
C) commercial paper.
D) fully drawn advance.

Accepted Answer

A fully drawn advance is a long-term loan with a fixed interest rate and repayment schedule, making it suitable for financing assets like a printing press with a five-year life. Overdrafts, bank bills, and commercial papers are typically used for shorter-term financing needs.

Question 20

The main longer-term finance provided by financial intermediaries is/are:
A) certificates of deposit.
B) commercial paper.
C) corporate bonds.
D) term loans.

Accepted Answer

Term loans are the main longer-term finance provided by financial intermediaries such as banks and other lending institutions. These loans are typically repaid over a period of several years and are used to finance business operations, acquisitions, and other major investments. While certificates of deposit, commercial paper, and corporate bonds may also be offered by financial intermediaries, they are typically shorter-term financial instruments.

Quiz 10: Medium-To-Long-Term Debt

A bank charge on any part of a loan that has not been fully drawn down by a company is called a/an:

A company can borrow from a bank at a margin to the bank's base rate.According to the text,all of the following factors affect this margin except:

Long-term debt can be categorised as financing with an initial maturity:

Which of the following rates serves as a reference interest rate in Australia?

Term loans where each periodic loan payment consists of interest payments and then the principal is repaid in full at maturity are:

Compared with an amortised loan,a deferred repayment loan involves:

In relation to long-term financing,a fully drawn advance is a:

All of the following affect interest rates charged on term loans except:

Which of the following statements best describes a fully amortised term loan?

If a company wished to structure its financing so it repaid funds borrowed only when a project begins to have positive cash flows,it would choose a/an:

________ granted by banks generally have maturities of three to 15 years and are often made to finance capital expenditure such as building construction and the purchase of real estate.

If the interest rates on shorter term-to-maturity deposits are higher than those of longer term deposits,it is likely that the costs for the longer term financing for a company are:

In relation to long-term financing,an amortised loan involves:

The fees charged by banks onto the total amount of the loan facility and are normally payable in advance are:

The fees that represent bank costs in considering loan applications and document preparation are called:

Banks usually charge a/an _______ for any portion of a term loan that has not been drawn down.

One of the advantages of a prime rate set by a financial institution is that it is less likely to be affected by:

A term loan is:

If a company wishes to finance a printing press with a five-year life,it would be advisable to finance it with a/an:

The main longer-term finance provided by financial intermediaries is/are: