Final Ch8

Question 1

trade credit

Answer 1

an agreement where a customer can purchase goods on account (without paying cash), paying the supplier at a later date

Question 2

trade credit payment period

Answer 2

usually 30-60 days
* Extending the payment period to an unacceptable period results in:

  * Alienate suppliers 
  * Diminished ratings with credit bureaus

Question 3

cash discount policy

Answer 3

allows reduction in price if payment is made within a specified time period

Question 4

2/10 net 30 cash discount

Answer 4

2% reduction if funds are sent 10 days after billing, failure to do so means full payment by the 30th day

Question 5

net credit position

Answer 5

difference between accounts receivable and accounts payable

Question 6

bank credit

Answer 6

the amount of credit available to a company or individual from the banking system

Question 7

prime rate

Answer 7

• the rate a bank charges to its most creditworthy customers

- increases as a customers credit risk increases

Question 8

LIBOR

Answer 8

• London Interbank Offered Rate
• rate offered to companies
  1. having an international presence
  2. ability to use the london eurodollar market for loans

Question 9

compensating balance

Answer 9

a minimum balance that must be maintained in an account as an alternate for fee charged by the bank for services

Question 10

term loan

Answer 10

loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate

Question 11

effective annual interest rate

Answer 11

the rate of interest an investor earns in a year after accounting for the effects of compounding

Question 12

installment loans

Answer 12

require a series of equal payments over the period of the loan

Question 13

annual percentage rate

Answer 13

equal dollar amount is paid each period to repay interest and principal

Question 14

commercial paper

Answer 14

unsecured, short-term loan issued by a corporation

Question 15

forms of commercial paper (3)

Answer 15

1. finance paper/direct paper (sold by financial firms directly to the lender)
2. dealer paper (paper sold by industrial companies through an intermediate dealer network
3. asset backed commercial paper

Question 16

advantages of commercial paper (4)

Answer 16

1. may be issued at below the prime interest rate
2. no associated compensating balance requirements
3. prestige of being able to float their paper in a “snobbish market”
4. firms required to keep lines of credit equal to the amount of paper outstanding

Question 17

limitations of commercial paper (3)

Answer 17

1) It is available only to a few selected blue chip and profitable companies.
2) By issuing commercial paper, the credit available from the banks may get reduced.
3. lacks the degree of commitment and loyalty associated with bank loans

Question 18

use of collateral in short-term financing (3)

Answer 18

secured credit arrangement when:

1. credit rating of the borrow is too low
2. need for funds is very high
3. primary concern - whether the borrower can generate enough cash flow to liquidate the loan when due

Question 19

Accounts Receivable Financing

Answer 19

A type of asset-financing arrangement in which a company uses its receivables - which is money owed by customers - as collateral in a financing agreement.
includes:
1. pledging accounts receivables
2. factoring receivables

Question 20

pledging accounts receivable

Answer 20

placing accounts receivable as collateral for a loan

Question 21

factoring receivables

Answer 21

physically selling accounts receivables as a way of speeding up the receipt of cash

Question 22

Asset backed public offering

Answer 22

a financial security backed by a loan, lease or receivables

Question 23

inventory financing

Answer 23

a line of credit or short-term loan made to a company so it can purchase products for sale

Question 24

blanket inventory liens

Answer 24

lender has a general claim against inventory (items not identified)

lien: a right to keep possession of property belonging to another person until a debt owed by that person is discharged

Question 25

trust receipts

Answer 25

An instrument acknowledging that the borrower holds inventory and the proceeds from sales in trust for the lender (items marked)

Question 26

warehousing

Answer 26

Goods are physically identified and can be moved only with the lender’s approval

Question 27

hedging

Answer 27

engaging in a transaction that partially or fully reduces a prior risk exposure

Question 28

futures market

Answer 28

An auction market in which participants buy and sell commodity/future contracts for delivery on a specified future date.