All commercial paper involves the physical transfer of actual paper certificates
The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30
The Truth in Lending law is designed to protect
a. Corporate borrowers
d. Investors in municipal bonds
The commercial paper market is available to most large New York Stock Exchange companies
Factoring accounts receivable, unlike pledging accounts receivable, typically passes the risk of loss on the receivable to the buyer.
Holland Construction Co. has an outstanding 180 day bank loan of $400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its checking account. What is the effective interest cost on the loan? Assume the company would not normally maintain this average amount.
Compensating balances represent unfair hidden costs of borrowing.
8. Accounts receivable may be used as a source of financing by
a. Pledging the receivables as loan collateral
b. Factoring the receivables to a finance company
c. Selling securities backed by the receivables
d. All of the above
d All of the above
Commercial bank term loans
a. Usually carry fixed interest rates
b. Are very short term in nature
c. Are offered to superior credit applicants
d. Both b and c
c Are offered to superior credit applicants
It is easier for small firms to obtain financing through bank loans than through the commercial paper market.
Compensating balances are important for banks because their existence allows them to make loans at lower quoted rates.
Bank loans to business firms
a. Are usually short-term in nature
b. Are preferred by the banker to be self-liquidating
c. May require compensating balances
d. All of the above
d All of the above
The cost of not taking the discount on trade credit of 3/10, net 30 is equal to
d. None of the above
Which of the following is not a characteristic of commercial paper?
a. Issued by large firms
b. One-to-two year maturity
c. Rates are usually below prime rates on business loans
d. All the above are commercial paper characteristics
b One-to-two year maturity
Hedging refers to
a. Avoiding high risk investment opportunities
b. A transaction that reduces risk exposure
c. The same thing as asset diversification
d. Avoiding the financial futures market
b A transaction that reduces risk exposure
From the banker’s point of view, short-term bank credit is an excellent way of financing
a. Fixed assets
b. Permanent working capital needs
c. Repayment of long-term debt
d. Seasonal bulges in inventory and receivables
d Seasonal bulges in inventory and receivables
The financial futures market
a. Is a place in Chicago where future stocks are traded
b. Allows for the delivery of financial instruments at a future point in time
c. Is of particular value to small investors in managing their portfolios
d. Two of the above
b Allows for the delivery of financial instruments at a future point in time
Trade credit is usually extended for periods of one year or more
General Motors Acceptance Corp is one of the biggest issuers of asset backed securities
Bank deregulation has eased competition between commercial banks, savings and loans, brokerage houses, and new financial services companies.
Commercial paper has which of the following advantages:
a. It may be issued below the prime rate
b. It requires no compensating balances
c. It is secured by corporate assets to protect the buyer
d. a and b are both correct
d a and b are both correct
Commercial paper is an unsecured short-term IOU from a large financially secure company.
The commercial paper market is available to most large New York Stock Exchange companies.
The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
Commercial paper represents secured short-term borrowing by large companies.