GBG 333 – Review Questions Chapter 8
Sources of Short-Term Financing
(1) Which statement is consistent with the concept of "spontaneous source of funds"?
(a) As the business grows, accounts payable becomes a source of funds to finance the long term capital equipment needs of the firm.
(b) As the business grows, accounts payable becomes a source of funds to finance the working capital needs of the firm.
(c) As the business grows, banks automatically approach the firm to offer advantageous credit terms.
(d) None of the above is true.
(2) Which statement is consistent with the concept of the "cash discount"?
(a) A reduction in the invoice price if payment is made within a specified time period.
(b) An example would be 2/10 net 30, in which a cash discount of 10% is granted if payment is made within 30 days.
(c) An example would be 2/10 net 30, in which a cash discount of 2% is granted if payment is made within 30 days.
(d) Usually a cash discount is granted only if payment is made at the time of sale.
(3) Which statement is consistent with the concept of "net trade credit" position?
(a) The net trade credit position is positive when accounts payable are greater than accounts receivable.
(b) The net trade credit position is negative when accounts receivable are greater than accounts payable.
(c) Larger firms tend to be net providers of trade credit, that is, have relatively high receivables relative to payables.
(d) It is a measure of the relationship between the firm's current assets and current liabilities.
(4) What is the prime rate?
(a) It is the price of the best cuts of beef, such as prime rib.
(b) The rate of interest a bank charges its most creditworthy customers.
(c) The market price of securities sold in the primary market, the first-time issue of new securities.
(d)
It is the interest rate quoted
by the Federal Reserve Board for short-term loans among the banks in the
(5) What is the LIBOR (London Interbank Offered Rate)?
(a) It is the interest rate quoted by the Federal Reserve Board for short-term loans among US banks operating in the international money markets.
(b)
It is the interest rate quoted
by the Bank of England for short-term loans among banks in the
(c) It is the interest rate that is directly affected by Open Market Operations by the Federal Reserve Board.
(d)
Is a competitor to the
(6) A compensating balance is:
(a) a payment made by corporate customers to a bank for services such as managing trust accounts.
(b) the amount of money required to balance current assets and current liabilities.
(c) a maximum account balance required by a bank in order for a customer to avoid service charges.
(d) often required by a bank when obtaining a loan.
(7) Which of the following statements is consistent with the term "instalment loan"?
(a) If you pay $60 interest for a $1,000 loan for one year, and must pay more than one instalment during the year, your effective interest rate is 6%.
(b) As the number of instalments increases, the ease of repayment is increased, and your effective interest rate falls.
(c) As the number of instalments falls, the ease of repayment falls, and your effective interest rate increases.
(d) None of the above is true.
(8) Which of the following statements is consistent with the concept of annual percentage rate (APR)?
(a) Congress through the Truth in Lending Act enacted it in 1968 to reduce the cost of interest to low income borrowers.
(b) It is a measure similar to the effective rate of interest on a loan.
(c) Applies only to corporate customers of banks.
(d)
It is the interest rate quoted
by the Federal Reserve Board for short-term loans among the banks in the
(9) What is "commercial paper"?
(a) It is a convenient way for small firms for raising funds, rather than seeking bank loans.
(b) An instalment loan issued by a bank to a business, rather than a household.
(c) A long-term note issued by a firm to the public in relatively small denominations, such as $500 units.
(d) A means available for large and prestigious firms to raise funds without having to seek bank loans, or other sources of short term financing.
(10) The concept of "pledging accounts receivable" is consistent with which statement?
(a) It is the outright sale of accounts receivable to a finance company or a bank, as a means for a firm to raise immediate cash.
(b) A firm can receive a loan from a bank by using its accounts receivable as collateral.
(c) A firm usually may borrow close to 100% of the value of accounts receivable pledged as collateral.
(d) It is an agreement by a firm with another firm in which one agrees to share technology with the other in return for the right to develop new products.
(11) The concept of "factoring" is consistent with which statement?
(a) It is the outright sale of accounts receivable to a finance company or a bank, as a means for a firm to raise immediate cash.
(b) The practice of banks when "factoring" all the characteristics of a prospective borrower, to determine whether or not to grant a loan.
(c) It involves the "pledging" of accounts receivable to a bank as collateral for a loan.
(d) It involves a cash discount to a customer when they pay an invoice within a set period of time, such as 10 days.
(12) Which statement about "asset-backed securities" is incorrect?
(a) It involves the sale of receivables in securities markets.
(b) It has the advantage of trading future cash flows for immediate cash.
(c) Home equity loans receivables, automobile and credit card receivables are the most commonplace "asset-backed securities".
(d) It is the outright sale of accounts receivable to a finance company or a bank, as a means for a firm to raise immediate cash.
(13) Which of the following statements is not true about aspects of inventory financing?
(a) A trust receipt acknowledges that the title to the inventory belongs to the borrower.
(b) A blanket inventory lien is a general claim by the lender against the inventory of the borrower.
(c) Public warehousing is an arrangement by which goods under control by the lender are stored and managed by public warehousing firm.
(d) Field warehousing is similar to public warehousing, except that the goods are held at the borrower's premises, but managed by an independent warehousing company.
(14) Hedging means:
(a) to take a position to counteract your risk exposure.
(b) to take a position to profit from the security transaction
(c) to establish a general claim against the inventory of a borrower..
(d) to buy and sell securities in order to make a profit.