Question 1

Large firms tend to be

Accepted Answer

A)  net users of trade credit. 
B)  net suppliers of trade credit. 
C)  firms with high levels of profitability. 
D)  firms with low levels of inventory turnover and accounts receivable turnover.

Question 2

In determining the cost of bank financing, which is the most important factor?

Accepted Answer

A)  The prime rate 
B)  The nominal rate 
C)  The effective rate 
D)  The discount rate

Question 3

The "financial futures market"

Accepted Answer

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)  is a place in Chicago where future stocks are traded and is of particular value to small investors in managing their portfolios

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Friedman Roses Inc. needs $65,000 in funds for expansion. With a compensating balance requirement of 20%, how much will the firm need to borrow?

Accepted Answer

A)  $16,000 
B)  $81,250 
C)  $100,000 
D)  $78,000

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Finance paper, unlike commercial paper, represents a long-term, unsecured promissory note.

Accepted Answer

A) True 
 B)False

Question 9

Firms exposed to the risk of interest rate changes may reduce that risk by

Accepted Answer

A)  obtaining a Eurodollar loan. 
B)  hedging in the financial futures market. 
C)  hedging in the commodities market. 
D)  pledging or factoring accounts receivable.

Question 10

It is difficult to acquire a loan in U.S. dollars outside the United States.

Accepted Answer

A) True 
 B)False

Question 11

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%

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Question 14

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.

Question 15

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%

Question 16

A term loan is less risky to the bank, thus they provide a fixed rate to the customer.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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

Accepted Answer

A) True 
 B)False

Question 19

The prime rate

Accepted Answer

A)  is the rate a bank charges its risky customers. 
B)  has been quite volatile during the past two decades, moving several percentage points in a 12-month period. 
C)  is usually lower than Treasury bill rates. 
D)  None of these options are true.

Question 20

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

Exam 8: Sources of Short-Term Financing

Large firms tend to be

In determining the cost of bank financing, which is the most important factor?

The "financial futures market"

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

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

Friedman Roses Inc. needs $65,000 in funds for expansion. With a compensating balance requirement of 20%, how much will the firm need to borrow?

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

Finance paper, unlike commercial paper, represents a long-term, unsecured promissory note.

Firms exposed to the risk of interest rate changes may reduce that risk by

It is difficult to acquire a loan in U.S. dollars outside the United States.

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

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

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

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

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?

A term loan is less risky to the bank, thus they provide a fixed rate to the customer.

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

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

The prime rate

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