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, 2019 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?
65) Commercial paper is a form of financing that consists of short-term, secured promissory notes issued
by firms with a high credit standing.
66) For firms that are able to raise funds through the sale of commercial paper, it is generally cheaper
than borrowing from a commercial bank.
67) 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.
68) The interest paid by the issuer of commercial paper is determined by the size of the discount and the
length of time to maturity.
69) The risk to a U.S. importer with foreign-currency-denominated accounts payable is that the dollar will
depreciate.
70) 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.
71) Exchange rate risk can often be hedged by using currency forward, futures, or options markets.
72) 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
73) 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
74) 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
75) A large portion of the commercial paper is issued by ________.
A) commercial finance companies
B) government agencies
C) venture capitalists
D) small manufacturing firms
76) 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
77) The cost of borrowing through the sale of commercial paper is typically ________ the prime bank loan
rate.
A) lower than
B) the same as
C) unrelated to
D) higher than
78) A firm issued $2 million worth of commercial paper that has a 90-day maturity and sells for
$1,900,000. The annual interest rate on the issue of commercial paper is ________ (assume 360 days in a
year).
A) 5.26 percent
B) 10 percent
C) 17.77 percent
D) 21.05 percent
79) A firm has directly placed an issue of commercial paper that has a maturity of 60 days. The issue sold
for $980,000 and has an annual interest rate of 12.24 percent. The value of the commercial paper at
maturity is ________ (assume 360 days in a year).
A) $19,992
B) $980,000
C) $1,000,000
D) $960,008
80) Tangshan Mining issued $1,000,000 of commercial paper for $992,500 for 45 days. Based on this
information, the effective annual rate of interest on the commercial paper would be ________ (assume 360
days in a year).
A) 6.13%
B) 6.20%
C) 6.32%
D) 6.08%
81) A U.S.-based company that exports goods and has accounts receivable denominated in a foreign
currency ________.
A) faces no risk if the relations between the countries get rough
B) faces the risk that the U.S. dollar will depreciate in value relative to the foreign currency
C) faces the risk that the U.S. dollar will appreciate in value relative to the foreign currency
D) faces the risk that the foreign currency would appreciate in value relative to the U.S dollar
82) A letter written by a company’s bank to the company’s foreign supplier, stating that the bank will
guarantee payment of an invoiced amount if all the underlying agreements are met is called ________.
A) a letter of invoice
B) a letter of intent
C) a letter of credit
D) commercial paper
83) Bessey Aviation has just sold an issue of 30-day commercial paper with a face value of $5,000,000. The
firm has just received $4,958,000. What is the effective annual interest rate on the commercial paper?
84) Tina’s Apple Company would like to manufacture and market a new packaging. Tina’s has sold an
issue of commercial paper for $1,500,000 and maturity of 90 days to finance the new project. Compute the
annual interest rate on the issue of commercial paper if the value of the commercial paper at maturity is
$1,650,000 (assuming 360 days in a year).