Question 1

Which of the following best describes the benefits to the borrower of selling asset-backed securities?

Accepted Answer

A)  Due to the portfolio effect, the borrower can package up low-quality accounts receivable and sell them for a premium price. 
B)  The borrower trades future cash flows for current cash flows. 
C)  The asset-backed security is likely to carry a high credit rating of AA or better. 
D)  The borrower trades future cash flows for current cash flows and the asset-backed security is likely to carry a high credit rating of AA or better. 
A)  Due to the portfolio effect, the borrower can package up low-quality accounts receivable and sell them for a premium price. 
B)  The borrower trades future cash flows for current cash flows. 
C)  The asset-backed security is likely to carry a high credit rating of AA or better. 
D)  The borrower trades future cash flows for current cash flows and the asset-backed security is likely to carry a high credit rating of AA or better.

Question 2

The annual percentage rate requires the use of the actuarial method of compounded interest when calculating the APR.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Commercial bank term loans

Accepted Answer

A)  usually carry fixed interest rates. 
B)  are very short-term in nature. 
C)  are offered to superior credit applicants. 
D)  are very short-term in nature and are offered to superior credit applicants. 
A)  usually carry fixed interest rates. 
B)  are very short-term in nature. 
C)  are offered to superior credit applicants. 
D)  are very short-term in nature and are offered to superior credit applicants.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Accounts payable is a spontaneous source of funds that usually grows as the business expands.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

At historically low interest rate levels, compensating balances increase.

Accepted Answer

A) True 
 B)False

Question 9

The biggest categories of asset-backed securities are home equity loans, automobile receivables, and credit card receivables.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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 using the installment loan formula?

Accepted Answer

A)  10.5% 
B)  15.4% 
C)  18.9% 
D)  22.0% 
A)  10.5% 
B)  15.4% 
C)  18.9% 
D)  22.0%

Question 12

Attempting to "stretch the payment period" to receive additional short-term financing is an acceptable form of financing as long as it is not carried out to an abusive extent. (i.e. going from a 30- to a 35-day average payment).

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A)  16% 
B)  7.4% 
C)  29.5% 
D)  8.9% 
A)  16% 
B)  7.4% 
C)  29.5% 
D)  8.9%

Question 14

Commercial paper that is sold without going through a broker or dealer is known as

Accepted Answer

A)  direct paper. 
B)  dealer paper. 
C)  a book-entry transaction. 
D)  term paper. 
A)  direct paper. 
B)  dealer paper. 
C)  a book-entry transaction. 
D)  term paper.

Question 15

Approximately 40% of all short-term financing is in the form of accounts payable or trade credit.

Accepted Answer

A) True 
 B)False

Question 16

The lender's primary concern is whether the borrower's capacity to generate accounts receivables is sufficient to liquidate the loan as it comes due.

Accepted Answer

A) True 
 B)False

Question 17

Trade credit is usually extended for periods of one year or more.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A)  A lower interest rate. 
B)  The borrowing capacity fluctuates with accounts receivable. 
C)  It provides another source of financing for companies with lower credit ratings. 
D)  All of these are reasons for pledging accounts receivable. 
A)  A lower interest rate. 
B)  The borrowing capacity fluctuates with accounts receivable. 
C)  It provides another source of financing for companies with lower credit ratings. 
D)  All of these are reasons for pledging accounts receivable.

Question 19

In times of tight credit in the United States, Eurodollar loans become difficult to obtain.

Accepted Answer

A) True 
 B)False

Question 20

The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.

Accepted Answer

A) True 
 B)False

Exam 8: Sources of Short-Term Financing

Which of the following best describes the benefits to the borrower of selling asset-backed securities?

The annual percentage rate requires the use of the actuarial method of compounded interest when calculating the APR.

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

Commercial bank term loans

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

Accounts payable is a spontaneous source of funds that usually grows as the business expands.

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

At historically low interest rate levels, compensating balances increase.

The biggest categories of asset-backed securities are home equity loans, automobile receivables, and credit card receivables.

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

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 using the installment loan formula?

Attempting to "stretch the payment period" to receive additional short-term financing is an acceptable form of financing as long as it is not carried out to an abusive extent. (i.e. going from a 30- to a 35-day average payment).

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

Commercial paper that is sold without going through a broker or dealer is known as

Approximately 40% of all short-term financing is in the form of accounts payable or trade credit.

The lender's primary concern is whether the borrower's capacity to generate accounts receivables is sufficient to liquidate the loan as it comes due.

Trade credit is usually extended for periods of one year or more.

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

In times of tight credit in the United States, Eurodollar loans become difficult to obtain.

The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.

The Goals and Activities of Financial Management

Review of Accounting

Financial Analysis

Financial Forecasting

Operating and Financial Leverage

Working Capital and the Financing Decision

Current Asset Management

The Time Value of Money

Valuation and Rates of Return

Cost of Capital

The Capital Budgeting Decision

Risk and Capital Budgeting

Capital Markets

Investment Banking: Public and Private Placement

Long-Term Debt and Lease Financing

Common and Preferred Stock Financing

Dividend Policy and Retained Earnings

Convertibles, Warrants, and Derivatives

External Growth Through Mergers

International Financial Management

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