Ch 8 Flashcards
(18 cards)
What is trade credit?
Trade credit is a short-term financing source where firms delay payments for goods/services purchased from suppliers.
What is a cash discount in trade credit terms?
A cash discount (e.g., “2/10, n30”) offers a 2% discount if paid within 10 days, or the full amount is due in 30 days.
Net Credit Position
What are the different types of bank loans?
Discounted loans, installment loans, and compensating balance loans.
What is a self-liquidating loan?
A loan that generates cash flows to automatically repay the loan over time.
What is a demand loan?
A loan with an interest rate that fluctuates with the prime rate.
What is the prime rate?
The prime rate is the interest rate charged to a bank’s most creditworthy customers.
What is a discounted loan?
A loan where interest is deducted upfront, and the borrower receives the remaining amount.
What is commercial paper?
Short-term unsecured promissory notes issued by large corporations, often in denominations of $100,000.
What are the advantages of commercial paper?
It is cost-effective, does not require compensating balances, and asset-backed paper can reduce liabilities.
What is foreign borrowing?
Borrowing from foreign markets, such as the Eurocurrency market, often in foreign currency like U.S. dollars.
What is the Eurocurrency market?
The market for loans in foreign currency, often U.S. dollars, from foreign banks.
What is collateral financing?
Using assets like accounts receivable or inventory as collateral for loans.
What is pledging receivables?
Using receivables as collateral for a loan.
What is interest rate hedging?
The use of financial instruments (e.g., futures or swaps) to reduce the risk of interest rate fluctuations.
What does KDIS measure?
KDIS measures the cost of forgoing a discount when paying later than the discounted period.
What factors should be considered when evaluating the cost of financing?
Interest rate, fees, and the cost of forgoing discounts.
Why do firms hedge interest rate risk?
To lock in favorable interest rates and reduce borrowing costs in volatile markets.
