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Flashcards in Final Ch8 Deck (28)
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trade credit

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


trade credit payment period

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

* Alienate suppliers
* Diminished ratings with credit bureaus


cash discount policy

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


2/10 net 30 cash discount

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


net credit position

difference between accounts receivable and accounts payable


bank credit

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


prime rate

- the rate a bank charges to its most creditworthy customers
- increases as a customers credit risk increases



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


compensating balance

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


term loan

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


effective annual interest rate

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


installment loans

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


annual percentage rate

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


commercial paper

unsecured, short-term loan issued by a corporation


forms of commercial paper (3)

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


advantages of commercial paper (4)

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


limitations of commercial paper (3)

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


use of collateral in short-term financing (3)

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


Accounts Receivable Financing

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.
1. pledging accounts receivables
2. factoring receivables


pledging accounts receivable

placing accounts receivable as collateral for a loan


factoring receivables

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


Asset backed public offering

a financial security backed by a loan, lease or receivables


inventory financing

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


blanket inventory liens

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


trust receipts

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



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



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


futures market

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