Chapter 08 – Sources of Short-Term Financing
109. The effective rate on a $20,000 installment loan with quarterly payments, $2,000 in
interest, for 2 years is:
110. All of the following are evident during a credit crunch except:
111. All of the following are benefits of commercial paper to the corporation except:
Chapter 08 – Sources of Short-Term Financing
112. The reasons why a company may choose to pledge accounts receivable are all of the
following except:
Chapter 08 – Sources of Short-Term Financing
113. Match the following with the items below:
2. asset-backed public
A measure of the relationship between accounts
The practice of using accounts receivables from
sales of computers and automobiles, for example, to
collateralize an offering of securities in the secondary
An extension of credit generally for a time period
6. compensating
Arise through the normal course of business from
7. annual percentage
A loan from a foreign bank denominated in U.S.
A legal entity in which one key bank owns a
number of affiliate banks as well as other nonbank
10. bank holding
An unsecured promissory note issued by a large
11. spontaneous
A bank requirement that business customers
12. self-liquidating
A benchmark interest rate set in Europe that is
Bank loans that are usually paid off as the
The interest level charged to a bank’s most
Chapter 08 – Sources of Short-Term Financing
8-37
114. Match the following with the items below:
1. public
2. field
3. securitization of
An inventory financing arrangement in which
collateralized inventory is stored on the premises of the
borrower, but is controlled by an independent warehousing
Lessening or eliminating risk by taking a position that is
5. factoring
A secured borrowing arrangement in which the lender
has a general claim against the stock in trade of the
An instrument acknowledging that the borrower holds
the inventory and proceeds from sale in trust for the
An inventory-financing arrangement in which inventory
used as collateral is stored with and controlled by an
This loan features subtraction of the calculated interest
9. pledging
10. blanket
An unsecured promissory note issued by a large
11. commercial
A form of commercial paper sold from a finance
The issuance of a security that pledges the backing of
A legal agreement to buy or sell a commodity/or
A form of commercial paper sold from a small company
15. installment
Financing provided by sellers or suppliers in the normal
Chapter 08 – Sources of Short-Term Financing
Chapter 08 – Sources of Short-Term Financing
115. Slipshod Machine Tool Co. owes $55,000 to one of its suppliers. The supplier has
offered a trade discount of 2/10 net 30. Slipshod can borrow the funds from either of two
banks: First City Bank will loan the funds for 20 days at a cost of $500; Upstart Bank offers a
discounted loan for 20 days at a cost of $375.
a) What is the cost of failing to take the discount?
b) What is the effective interest rate on each of the loans?
c) Should Slipshod take the cash discount?
d) Which bank loan should Slipshod use?
Chapter 08 – Sources of Short-Term Financing
116. Brand Advertising is offered a 3/10 net 40 trade discount by its supplier. In the past
Brand has been able to get away with paying for supplies on credit in 60 days. Since it doesn’t
have money on hand to take advantage of the discount, it tries to negotiate a loan with
Portland State Bank. The amount of $400,000 with a 12% compensating balance and a $6,200
interest charge has been negotiated for the month of May. Brand already maintains a $16,250
balance at the bank. Compute the effective rate of interest on the loan, and the cost of not
taking the discount. Should Brand take advantage of the cash discount?
Chapter 08 – Sources of Short-Term Financing
117. Business Book Publishing needs to borrow $800,000 in order to finance its new
inventory. Two banks they were considering offered different annual loan terms: Marine Bank
offered a 7% loan with a 15% compensating balance to be paid back in quarterly payments.
McLean National Bank offered Business Book Publishing a 8.25% loan to be paid back semi-
annually. Which loan terms should Business Book Publishing take?
Chapter 08 – Sources of Short-Term Financing
118. The Magic Pumpkin Limousine Company wants to purchase a car entertainment system
for one of its automobiles. The entertainment system vendor has offered to finance the $2,000
purchase over one year in 12 installments, with a total of $200 in interest to be paid on the
loan. Magic Pumpkin’s bank has offered to finance the purchase with an installment loan,
where $155 in interest will be repaid and payments on the loan must be made quarterly. What
are the effective interest rates on these loans? Which loan should they select?
Chapter 08 – Sources of Short-Term Financing
119. In order to finance a shipment of badminton sets, Rujisawa Import-Export is seeking a
$700,000 one-year bank loan. The Marine Bank requires that Rujisawa maintain a 25%
compensating balance and requires four quarterly payments. The Lincoln Bank requires only
a 15% compensating balance, but requires 12 monthly payments. In addition, Lincoln
discounts the loan. Both banks state that their interest rate is 8%.
a) Which bank has the lowest effective interest rate?
(NOTE: deduct the compensating balances from the principal in determining the effective
rate)
b) If Lincoln Bank eliminated its compensating-balance requirement, would your answer
change?
Chapter 08 – Sources of Short-Term Financing
121. What is the effective rate of interest if the bank uses a discounted loan?
Chapter 08 – Sources of Short-Term Financing
122. What is the effective rate of interest if the loan is an installment loan with 12 payments?
123. What is the effective rate of interest if the loan is a discounted loan with a 10 percent
compensating balance?
124. Annual payment.
Chapter 08 – Sources of Short-Term Financing
125. Semiannual payments.
126. Quarterly payments.
127. Monthly payments.