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Exam 8: Sources of Short-Term Financing

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Question 41

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A trade discount is a percentage reduction from the invoice price given for purchasing certain minimum quantities.

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Question 42

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Small businesses frequently find commercial paper a useful means of obtaining funds when it is not possible to raise funds by other means.

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Question 43

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Which of the following is not a characteristic of commercial paper?

Multinational firms have found that they can lower borrowing costs

Even though a firm factors its receivables to a finance company, it is still liable if the account becomes uncollectible.

Ms. Smith borrowed $2,000 at an 8% stated rate of interest and was to pay back the loan in 24 monthly payments. What is her effective rate of interest?

A self-liquidating loan is preferable to a bank because it generally provides them with a higher return.

What is the effective rate of interest if the loan is an installment loan with 12 payments?

The reasons why a company may choose to pledge accounts receivable are all of the following except:

A compensating balance will be lower in periods of tight money than in periods of credit ease.

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?

Compensating balances are important for banks because their existence allows them to make loans at lower quoted rates.

The biggest category of asset backed securities is the home equity loan, followed by automobile receivables and credit card receivables.

Commercial paper represents secured short-term borrowing by large companies.

What is the effective rate of interest if the bank uses a discounted loan?

All commercial paper involves the physical transfer of actual paper certificates.

General Motors Acceptance Corp is one of the biggest issuers of asset-backed securities.

Which of the following is not a true statement about commercial paper?

A cash discount calls for a reduction in price if payment cannot be made within a specified time period.

The most common form of short-term financing is a bank loan.