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Finance Flashcards

Financial Management (1)

What is generally the largest source of short-term credit for small firms Trade Credit
Trade credit may be used to finance a major part of the firm’s working capital when: the firm extends less liberal credit terms than the supplier.
LIBOR is an interest rate paid on deposits of US dollars in the London market.
A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of its customers? Increased payables and decreased bank loans.
In determining the cost of bank financing, which is the important factor? Annual Rate
The bank rate is determined by: the Bank of Canada overnight rate.
Financial managers may prefer financial futures markets in the United States to the Montreal Futures Exchange because of: greater liquidity
Sears Canada Receivables Trust receives a better credit rating than Sears Canada because: credit card receivables have a low default rate.
Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its chequing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount. 11.18%
Which of the following is not a characteristic of commercial paper? One-to-two year maturity.
The extent to which inventory financing may be used depends on: how perishable the goods are.
Which of the following is not a method for lenders to control pledged inventory Factoring
Multinational firms have found that they can lower borrowing costs: by borrowing foreign currencies through foreign subsidiaries at rates lower than the Canadian prime and then converting these foreign loans into dollars.
Bank loans to business firms: may require compensating balances.
The cost of not taking the discount on trade credit of 3/10, net 30 is equal to: 56.44%.
Ms. Smith borrowed $1,250 at an 11% stated rate of interest and was to pay back the installment loan in 24 monthly payments. What is her annual rate of interest? 11.60%
If Analog computers can borrow at 9.5% for 3 years, what is the annual rate of interest on an $800,000 loan where a 15% compensating balance is required? 11.18%
The financial futures market: allows for the trading of a financial instruments at a future point in time.
The prime rate: is affected by economic and political factors.
Bank term loans are offered to superior credit applicants.
Firms exposed to the risk of interest rate changes may reduce that risk by: hedging in the financial futures market.
A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from: rising interest rates
Other things being equal, an increase in the number of days that a commercial bank loan is outstanding will mean: an increase in the dollar amount of the interest.
When calculating a loan with a 20% compensating balance a firm would borrow ____ in order to have available funds of $200,000. $250,000
Commercial paper that is sold without going through a broker or dealer is known as: direct paper.
Commercial paper that is sold without the use of an actual paper certificate is known as: book-entry paper
Accounts receivable may be used as a source of financing by: factoring the receivables to a finance company.
Which method of controlling pledged inventory provides the greatest degree of security to the lender? Warehousing
A term loan is usually characterized by: monthly or quarterly instalment payments.
The required compensating balance is usually computed as a: percentage of customer loans outstanding.
Which of the following is not a true statement about commercial paper? Dealer paper is sold directly to the lender by a finance company.
Which of the following best describes the benefits to the borrower of selling asset backed securities? The asset-backed security may carry a better credit rating.
Compensating balances: are used by banks as a substitute for charging service fees.
Securitized paper: is backed by a variety of assets.
After treasury bills, the largest outstanding short-term security is: bankers’ acceptances.
The London Interbank Offered Rate (LIBOR): is the rate used when banks lend to each other.
A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 3.5/9, net 25. What change might be expected on the balance sheets of its customers? Decreased payables and increased bank loans.
Francis Construction Co. has an outstanding 180-day bank loan of $600,000 at an annual interest rate of 8%. The company is required to maintain a 20% compensating balance in its chequing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount. 10.0%
Which of the following is a characteristic of commercial paper? Issued by large firms.
The cost of forgoing the discount on trade credit of 1/10, net 30 is equal to 18.43%
Bank loans to business firms: are preferred by the banker to be self-liquidating.
Mrs. Robinson borrows $5,000 for 90 days and pays $80 interest. What is her annual rate of interest? 6.49%
Mr. Phelps borrows $3,000 for 30 days and pays $80 interest. What is his annual rate of interest? 32.44%
The bank rate: is the rate that the Bank of Canada charges Chartered banks.
The London Interbank Offered Rate (LIBOR): (2) often is lower than the domestic prime rate.(2)
You are considering buying a new big screen TV from the BIG Electronics Co. BIG has offered to finance your purchase by extending credit to you. The terms of the credit are 12 easy monthly payments of $95. If you choose to finance this purchase, rather than pay the cash price of $850, what would your annual interest on this loan be? 57.99%

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