Question 1

The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30.

Accepted Answer

A) True 
 B)False

Question 2

Issuers of commercial paper can be divided into finance paper or direct paper, dealer paper, and asset-backed commercial paper.

Accepted Answer

A) True 
 B)False

Question 3

The sale of securities backed by the receivables of large credit-worthy firms is a large and growing source of financing.

Accepted Answer

A) True 
 B)False

Question 4

The London Interbank Offered Rate (LIBOR)

Accepted Answer

A)  competes with the U.S. Prime Rate for those companies with an international presence. 
B)  has been lower than the U.S. Prime Rate for at least the last decade. 
C)  is an estimate of the interbank lending rate for London banks. 
D)  all of these options are correct. 
A)  competes with the U.S. Prime Rate for those companies with an international presence. 
B)  has been lower than the U.S. Prime Rate for at least the last decade. 
C)  is an estimate of the interbank lending rate for London banks. 
D)  all of these options are correct.

Question 5

Larger firms tend to be net users of trade credit, rather than net providers.

Accepted Answer

A) True 
 B)False

Question 6

"Stretching the payment period" refers to the practice of trying to take a trade discount after the discount period.

Accepted Answer

A) True 
 B)False

Question 7

Monthly installment loans usually increase the effective interest rate of borrowing by approximately 2 times the stated interest rate.

Accepted Answer

A) True 
 B)False

Question 8

A Eurodollar loan is a loan denominated in dollars and made by a foreign bank holding dollar deposits.

Accepted Answer

A) True 
 B)False

Question 9

One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures.

Accepted Answer

A) True 
 B)False

Question 10

Mr. Jones borrows $4,500 for 90 days and pays $75 interest. What is his approximate effective rate of interest?

Accepted Answer

A)  9.3% 
B)  6.7% 
C)  11.7% 
D)  1.7% 
A)  9.3% 
B)  6.7% 
C)  11.7% 
D)  1.7%

Question 11

The annual percentage rate (APR) is a measure of the effective rate of interest on a loan on an annualized basis.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)  11% 
B)  7.2% 
C)  8.2% 
D)  1.1% 
A)  11% 
B)  7.2% 
C)  8.2% 
D)  1.1%

Question 13

Commercial paper that is sold without the use of an actual paper certificate is known as

Accepted Answer

A)  finance paper. 
B)  dealer paper. 
C)  book-entry paper. 
D)  term paper. 
A)  finance paper. 
B)  dealer paper. 
C)  book-entry paper. 
D)  term paper.

Question 14

Compensating balances represent unfair hidden costs of borrowing.

Accepted Answer

A) True 
 B)False

Question 15

Trade credit may be used to finance a major part of a firm's working capital when

Accepted Answer

A)  the firm extends less liberal credit terms than the supplier. 
B)  the firm extends more liberal credit terms than the supplier. 
C)  the firm and the supplier both extend the same credit terms. 
D)  neither the firm nor the supplier extends credit. 
A)  the firm extends less liberal credit terms than the supplier. 
B)  the firm extends more liberal credit terms than the supplier. 
C)  the firm and the supplier both extend the same credit terms. 
D)  neither the firm nor the supplier extends credit.

Question 16

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

Accepted Answer

A)  declining interest rates. 
B)  rising interest rates. 
C)  inflation. 
D)  changes in hedging activities. 
A)  declining interest rates. 
B)  rising interest rates. 
C)  inflation. 
D)  changes in hedging activities.

Question 17

Approximately 40% of all short-term financing is in the form of loans from the bank.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is NOT a method for lenders to control pledged inventory?

Accepted Answer

A)  Factoring 
B)  Blanket inventory liens 
C)  Trust receipts 
D)  Warehousing 
A)  Factoring 
B)  Blanket inventory liens 
C)  Trust receipts 
D)  Warehousing

Question 19

One advantage to an issuer of commercial paper is that the issuer eliminates the need for maintaining compensating balances and credit lines with a commercial bank.

Accepted Answer

A) True 
 B)False

Question 20

On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit.

Accepted Answer

A) True 
 B)False

Exam 8: Sources of Short-Term Financing

The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30.

Issuers of commercial paper can be divided into finance paper or direct paper, dealer paper, and asset-backed commercial paper.

The sale of securities backed by the receivables of large credit-worthy firms is a large and growing source of financing.

The London Interbank Offered Rate (LIBOR)

Larger firms tend to be net users of trade credit, rather than net providers.

"Stretching the payment period" refers to the practice of trying to take a trade discount after the discount period.

Monthly installment loans usually increase the effective interest rate of borrowing by approximately 2 times the stated interest rate.

A Eurodollar loan is a loan denominated in dollars and made by a foreign bank holding dollar deposits.

One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures.

Mr. Jones borrows $4,500 for 90 days and pays $75 interest. What is his approximate effective rate of interest?

The annual percentage rate (APR) is a measure of the effective rate of interest on a loan on an annualized basis.

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

Commercial paper that is sold without the use of an actual paper certificate is known as

Compensating balances represent unfair hidden costs of borrowing.

Trade credit may be used to finance a major part of a firm's working capital when

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

Approximately 40% of all short-term financing is in the form of loans from the bank.

Which of the following is NOT a method for lenders to control pledged inventory?

One advantage to an issuer of commercial paper is that the issuer eliminates the need for maintaining compensating balances and credit lines with a commercial bank.

On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit.

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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