28) Tangshan Mining borrowed $10,000 for one year under a line of credit with a stated interest
rate of 8 percent and a 10 percent compensating balance. Thus, the firm keeps a balance of about
$800 in its checking account.
29) Revolving credit agreements are guaranteed loans that specify the maximum amount that a
firm can owe the bank at any point in time.
30) Revolving credit agreements are non-guaranteed loans that specify the minimum amount that
a firm can owe the bank at any point in time.
31) Commitment fee is the fee that is normally charged on a revolving credit agreement.
32) Because the bank guarantees the availability of funds, a commitment fee is normally charged
on a simple line of credit agreement.
33) Cull Incorporated recently borrowed $250,000 from Century Bank when the prime rate was
4%. The loan was for 90 days with interest to be paid at the end of the period with a rate fixed at
1.5% above the prime rate. What is the total interest paid on this loan and what is the effective
annual rate? (Assume a 365 day year.)
A) The total interest paid is $3390.41 and the effective annual rate is 5.62%.
B) The total interest paid is $13,750 and the effective annual rate is 5.62%.
C) The total interest paid is $13,750 and the effective annual rate is 5.55%.
D) The total interest paid is $3390.41 and the effective annual rate is 1.36%.
34) The major type of loan made by banks to businesses is the ________.
A) fixed-asset-based loan
B) short-term secured loan
C) short-term, self-liquidating loan
D) capital improvement loan
35) Short-term loans that businesses obtain from banks and through commercial paper are
________.
A) negotiated and secured
B) negotiated and unsecured
C) spontaneous and secured
D) spontaneous and unsecured
36) Short-term, self-liquidating loans are intended to ________.
A) provide one-time loan to the borrower who needs funds for a specific purpose
B) cover seasonal peaks in financing caused by inventory and receivable buildups
C) provide maximum amount to the firm that it can owe to the bank
D) recapitalize the firm
37) A loan that is usually a one-time loan made to a borrower who needs funds for a specific
purpose for a short period is called a ________.
A) term loan
B) bill of exchange
C) mortgage loan
D) single-payment note
38) The ________ is the lowest rate of interest charged on business loans by the nation’s leading
banks to their best business borrowers.
A) prime rate
B) commercial paper rate
C) federal funds rate
D) treasury bill rate
39) A single-payment note generally has a maturity of ________.
A) 30 days to 9 months or more
B) 10 to 12 months or more
C) 12 to 24 months or more
D) 10 to 24 months or more
40) Which of the following are the three basic ways of lending unsecured, short-term funds by
commercial banks?
A) mortgage-backed securities, T-bonds, and commercial paper
B) single-payment note, lines of credit, and revolving credit agreements
C) T-bills, municipal bonds, and commercial paper
D) commercial paper, real estate bonds, and corporate bonds
41) In a line of credit arrangement, a firm pays interest on ________.
A) the full line of credit
B) the total line of credit
C) only the amount actually borrowed
D) only the amount actually borrowed and commitment fees on any unused portion of the loan
42) Loans on which the interest is paid in advance are often called ________.
A) premium loans
B) long-term loans
C) term deposits
D) discount loans
43) The prime rate of interest fluctuates with ________.
A) the changing supply-and-demand relationship for long-term funds
B) the changing supply-and-demand relationship for short-term funds
C) the liquidity requirement in a money market
D) the demand in a bond market
44) A ________ is an agreement between a commercial bank and a business that states the
maximum amount of unsecured short-term borrowing the bank will make available to the firm
over a given period of time, provided sufficient funds are available.
A) revolving credit agreement
B) line of credit
C) commercial paper
D) single payment note
45) Seasonal buildups of inventory and receivables are generally financed with ________.
A) short-term loans
B) long-term loans
C) retained earnings
D) stockholders’ equity
46) The effective interest rate generally is ________.
A) higher on a loan if interest is paid at maturity
B) lower if the loan is a discount loan
C) higher if the loan is a discount loan
D) not affected by whether the loan is a discount loan or a loan with interest paid at maturity
47) A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis and requires
compensating balances of 10 percent of the face value of the loan. The effective annual interest
rate associated with this loan is ________.
A) 12 percent
B) 13.3 percent
C) 13.6 percent
D) 15.4 percent
48) A(n) ________ effectively raises the interest cost to the borrower on a line of credit.
A) operating-change restriction
B) annual cleanup
C) compensating balance
D) commitment fee
49) A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances
of 10 percent of the face value of the loan. The effective annual interest rate associated with this
loan is ________.
A) 8.9 percent
B) 8 percent
C) 7.2 percent
D) 7.0 percent
50) ________ ensure that money lent under a line of credit agreement is actually being used to
finance seasonal needs.
A) Operating-change restrictions
B) Annual cleanups
C) Compensating balances
D) Commitment fees
51) A ________ guarantees the borrower that a specified amount of funds will be available
regardless of the scarcity of money.
A) revolving credit agreement
B) mortgage loan
C) short-term, self-liquidating loan
D) single payment note
52) Compared to a line of credit, a revolving credit agreement will be ________ for a firm.
A) a lower cost, higher risk method of short-term borrowing
B) a lower cost, lower risk method of short-term borrowing
C) a higher cost, higher risk method of short-term borrowing
D) a higher cost, lower risk method of short-term borrowing
53) In a revolving credit agreement, the firm pays interest on ________.
A) the full line of credit
B) the unused portion of the line of credit
C) the amount actually borrowed and compensating balance
D) the amount actually borrowed and commitment fees on any unused portion of the loan
54) With a floating-rate note, the interest rate on the note changes ________.
A) when the risk level of the borrower changes
B) when the prime rate changes
C) when the demand for loans changes
D) when bank profits changes
55) A firm arranges a discount loan at a 12 percent interest rate, and borrows $100,000 for one
year. The stated interest rate is ________ and the effective interest rate is ________.
A) 12.00%; 12.00%
B) 13.64%; 12.00%
C) 12.00%; 13.64%
D) 12.00%; 10.71%
56) XYZ Corporation borrowed $100,000 for six months from the bank. The rate is prime plus 2
percent. The prime rate was 8.5 percent at the beginning of the loan and changed to 9 percent
after two months. This was the only change. How much interest must XYZ corporation pay?
A) $2,476
B) $5,417
C) $18,212
D) $21,500
57) A firm has a line of credit and borrows $25,000 at 9 percent interest for 180 days or half a
year. What is the effective rate of interest on this loan if the interest is paid in advance?
A) 4.7 percent
B) 9.4 percent
C) 9.9 percent
D) 10.3 percent
58) A firm arranged for a 120-day bank loan at an annual rate of interest of 10 percent. If the
loan is for $100,000, how much interest in dollars will the firm pay? (Assume a 360-day year.)
A) $10,000
B) $30,000
C) $3,333
D) $1,000
59) Tangshan Mining borrowed $100,000 for one year under a line of credit with a stated interest
rate of 7.5 percent and a 15 percent compensating balance. Normally, the firm keeps almost no
money in its checking account. Based on this information, the effective annual interest rate on
the loan is ________.
A) 7.5%
B) 8.0%
C) 8.8%
D) 7.2%
60) Tangshan Mining borrowed $100,000 for one year under a line of credit with a stated interest
rate of 7.5 percent and a 15 percent compensating balance. Normally, the firm keeps a balance of
about $10,000 in its checking account. Based on this information, the effective annual interest
rate on the loan is ________.
A) 7.89%
B) 8.05%
C) 8.89%
D) 7.29%
61) Revolving credit agreements are ________.
A) guaranteed loans that specify the maximum amount that a firm can owe the bank at any point
in time
B) non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any
one time
C) credit arrangements made in cooperation with suppliers that allows a firm to roll over
accounts payable each month
D) short-term, unsecured promissory notes issued by a firm with a high credit standing
62) Tangshan Mining borrowed $100,000 for one year under a revolving credit agreement that
authorized and guaranteed the firm access to $200,000. The revolving credit agreement had a
stated interest rate of 7.5 percent and charged the firm a 1 percent commitment fee on the unused
portion of the agreement. Based on this information, the effective annual interest rate on the loan
is ________.
A) 7.5%
B) 8.0%
C) 8.5%
D) 9.0%
63) Hayley’s Theatrical Supply is in the process of negotiating a line of credit with two local
banks. The prime rate is currently 8 percent. The terms follow:
(a) Calculate the effective interest rate of both banks.
(b) Recommend which bank’s line of credit Hayley’s Theatrical Supply should accept.
64) Global Logistics purchased a new machine on October 20th, 2014 for $1,000,000 on credit.
The supplier has offered A&A terms of 2/10, net 45. The current interest rate the bank is offering
is 16 percent.
(a) Compute the cost of giving up cash discount.
(b) Should the firm take or give up the cash discount?
(c) What is the effective rate of interest if the firm decides to take the cash discount by
borrowing money on a discount basis?
15.4 Discuss the basic features of commercial paper and the key aspects of international short-
term loans.
1) Commercial paper is a form of financing that consists of short-term, secured promissory notes
issued by firms with a high credit standing.
2) For firms that are able to raise funds through the sale of commercial paper, it is generally
cheaper than borrowing from a commercial bank.
3) Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based on this
information, the effective annual rate of interest on the commercial paper would be about 10
percent.
4) The interest paid by the issuer of commercial paper is determined by the size of the discount
and the length of time to maturity.
5) The risk to a U.S. importer with foreign-currency-denominated accounts payable is that the
dollar will depreciate.
6) In doing business in foreign countries, financing operations in the local market not only
improves the company’s business ties to the host community but also minimizes exchange rate
risk.
7) Exchange rate risk can often be hedged by using currency forward, futures, or options
markets.
8) A ________ is a short-term, unsecured promissory note issued by firms with a high credit
standing. These notes are primarily issued by commercial finance companies.
A) line of credit
B) commercial paper
C) revolving line of credit
D) T-bill
9) Commercial paper issues have maturities ranging from ________.
A) six months to one year
B) one year to three years
C) three days to 270 days
D) 0 to 30 days
10) Commercial paper is issued in multiples of ________.
A) $1,000 or more
B) $10,000 or more
C) $100,000 or more
D) $1,000,000 or more
11) A large portion of the commercial paper is issued by ________.
A) commercial finance companies
B) government agencies
C) venture capitalists
D) small manufacturing firms
12) Commercial paper is ________.
A) sold at its par value
B) sold at a discount from its par value
C) sold at the prime rate
D) sold at a premium from its par value