70) The cost of not taking the discount on trade credit of 3/20, net 90 is approximately
________.
A) 15.9%
B) 16.3%
C) 18.0%
D) 17.4%
71) Bank loans to business firms
A) are usually short-term in nature.
B) are preferred by the banker to be self-liquidating.
C) may require compensating balances.
D) All of these options are true.
72) Commercial bank term loans
A) usually carry fixed interest rates.
B) are very short-term in nature.
C) are offered to superior credit applicants.
D) are very short-term in nature and are offered to superior credit applicants.
73) Kantorovich Company normally takes 30 days to pay for its average daily credit purchases of
$2,000. It has average daily sales of $3,000, and collects accounts in 25 days. What is its net
credit position?
A) $15,000
B) $1,000
C) ($1,000)
D) ($15,000)
74) Recent problems facing the U.S. financial system were the result of all but which one of the
following?
A) A huge increase in the amount of mortgage-backed securities being bundled up and sold in
the markets
B) A huge drop in the value of mortgage-backed securities
C) An increase in the use of commercial paper for short-term financing
D) The government permitting commercial and investment banks to merge
75) The prime rate
A) is the rate a bank charges its risky customers.
B) has been quite volatile during the past two decades, moving several percentage points in a 12-
month period.
C) is usually lower than Treasury bill rates.
D) None of these options are true.
76) The London Interbank Offered Rate (LIBOR)
A) competes with the U.S. Prime Rate for those companies with an international presence.
B) has been lower than the U.S. Prime Rate for at least the last decade.
C) is an estimate of the interbank lending rate for London banks.
D) all of these options are correct.
77) LIBOR is
A) a resource used in production.
B) an interest rate paid on Eurodollar loans in the London market.
C) an interest rate paid by European firms when they borrow Eurodollar deposits from U.S.
banks.
D) the interest rate paid by the British government on its long-term bonds.
78) Compensating balances
A) are used by banks as a substitute for charging service fees.
B) are created by having a sweep account.
C) lower the effective rate.
D) are used to reward new accounts.
79) 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
A) an installment loan.
B) a compensating balance.
C) a discounted loan.
D) a balloon payment.
80) 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?
A) $546,250
B) $758,264
C) $558,824
D) $71,250
81) 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?
A) 11.18%
B) 17.27%
C) 9.41%
D) 24%
82) A term loan is usually characterized by
A) a maturity of one to seven years.
B) a variable interest rate.
C) monthly or quarterly installment payments.
D) all of these options are true.
83) In determining the cost of bank financing, which is the most important factor?
A) The prime rate
B) The nominal rate
C) The effective rate
D) The discount rate
84) Mr. Jones borrows $4,500 for 90 days and pays $75 interest. What is his approximate
effective rate of interest?
A) 9.3%
B) 6.7%
C) 11.7%
D) 1.7%
85) Von Hayek’s Kayaks can borrow $12,500 for 60 days at a cost of $220 interest. What is the
effective rate of interest?
A) 8.3%
B) 9.8%
C) 10.6%
D) 1.8%
86) Kenneth’s Arrows and Bows borrows $15,000 for one year at an 8% annual interest rate.
What is the effective rate of interest if the loan is discounted?
A) Less than 8.5%
B) More than 8.5% but less than 9.5%
C) More than 9.5% but less than 10.5%
D) More than 10.5%
87) 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?
A) Less than 5.5%
B) More than 5.5% but less than 6.0%
C) More than 6.0% but less than 6.5%
D) More than 6.5%
88) 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?
A) 10.5%
B) 15.4%
C) 18.9%
D) 22.0%
89) The required compensating balance is usually computed as a
A) percentage of the customer’s loans outstanding.
B) factor of accounts receivable.
C) percentage of the bank’s commitments toward future loans to the customer.
D) percentage of the customer’s loans outstanding or percentage of the bank’s commitments
toward future loans to the customer.
90) 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.
A) 11.2%
B) 19.0%
C) 22.45%
D) 8.8%
91) 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?
A) Less than 10%
B) More than 10% but less than 11.6%
C) More than 11.6% but less than 12%
D) More than 12%
92) 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?
A) $16,000
B) $81,250
C) $100,000
D) $78,000