Economics Chapter 8 2 The Rate Bank Charges Its Risky Customers

73. The London Interbank Offered Rate (LIBOR)

74. LIBOR is

75. Compensating balances

76. General Rent-All’s officers arrange a $50,000 loan for the company. The company is required to

maintain a minimum checking account balance of 10% of the outstanding loan. This practice is called

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77. Analog Computers needs to borrow $475,000 from the Midland Bank. The bank requires a 15%

compensating balance. How much money will Analog need to borrow in order to end up with $475,000

spendable cash?

78. If Analog Computers can borrow at 8% annually for three years, what is the effective rate of interest on

a $1,000,000 loan where a 15% compensating balance is required?

79. A term loan is usually characterized by

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

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

interest?

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82. Von Hayek’s Kayaks can borrow $12,500 for 60 days at a cost of $220 interest. What is the effective

rate of interest?

83. Kenneth’s Arrows and Bows borrow $15,000 for one year at 8% annual interest. What is the effective

rate of interest if the loan is discounted?

84. East Coast Cleaners borrows $20,000 for 120 days and pays $400 interest. What is the effective rate of

interest if the loan is discounted?

85. 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?

86. The required compensating balance is usually computed as a

87. Holland Construction Co. has an outstanding 180-day bank loan of $475,000 at an annual interest rate

of 7.5%. The company is required to maintain a 15% compensating balance in its checking account. What

is the effective interest rate on the loan? Assume the company would not normally maintain this average

amount.

88. Koopman s Chickens, Inc. plans to borrow $275,000 from its bank for one year. The annual rate of

interest is 9%, but a compensating balance of 20% is required. What is the effective rate of interest?

89. 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?

90. Commercial paper is very popular with many firms because

91. The Truth in Lending law is primarily designed to protect

92. Commercial paper offers which of the following advantages to the issuer?

93. Which of the following is NOT a characteristic of commercial paper?

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

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

96. Which of the following is not a true statement about commercial paper?

97. Multinational firms have found that they can lower borrowing costs

98. Accounts receivable may be used as a source of financing by

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

100. Which of the following is associated with the recession of 2007-2009?

101. The extent to which inventory financing may be used depends on the

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

103. Which method of controlling pledged inventory provides the greatest degree of security to the lender?

104. Which of the following is NOT a method for controlling pledged inventory?

105. Hedging refers to

106. The “financial futures market”

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

108. If a firm has invested in corporate bonds, it may engage in a financial futures contract in order to

protect itself from

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

______.

110. The effective rate on a $20,000 installment loan with quarterly payments and $2,000 in total interest

for two years is approximately ______.

111. Which of the following is NOT evident during a credit crunch?

112. Which of the following is NOT a benefit of commercial paper to a corporation?

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

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Chapter 08 Test Bank – Static Summary