Lending to Business Firms (master)

_____________________ is used to finance the purchase of inventory to sell. The loan will be settled using the cash flows generated from selling inventory or receivables.

• Working capital loans

• Bridging loans

• Self-liquidating loans

• Revolving credit

Thermos has borrowed $1 million under a line-of-credit agreement. It must pay a stated interest rate of 9% and maintain, in its checking account, a compensating balance equal to 15% of the amount borrowed. What is the effective annual interest rate of the loan.

• 9.0%

• 9.6%

• 10.0%

• 10.6%

What is the primary purpose of interim construction financing?

• To support short-term personal expenses

• To fund long-term investments in stocks

• To facilitate the construction of various permanent structures

• To finance the purchase of luxury items

Once construction is completed, what type of loan is typically used to pay off the short-term construction loan?

• Personal loan

• Car loan

• Credit card debt

• Longer-term mortgage loan

What financing method is typically employed for projects requiring substantial funding, involving multiple lenders and a single borrower?

• Direct lending

• Microfinance

• Syndicated loans

• Peer-to-peer lending

Which of the following assets are often pledged by dealers in securities as collateral for short-term financing?

• A) Corporate bonds

• B) Government securities

• C) Real estate properties

• D) Precious metals

Which of the following statements BEST describes the concept of credit?

• Credit is established through immediate payment for goods, services, or investments.

• Credit is formed solely on the basis of tangible collateral provided by the borrower.

• Credit arises when one party receives funds or resources from another party with the promise of later payment.

• Credit transactions never involve the charging of interest by the lender.

The following features best describe

I. Interest is relatively high, and the bank will charge a commitment fee on unused amounts.

II. To cover seasonal peaks in the business customer’s production levels and credit needs.

 III. Commonly, it is secured by accounts receivable or by pledges of inventory.

IV. Loans to fund the current assets of a business, such as accounts receivable, inventories, or to replenish cash.

• Working capital loans

• Retailer financing loans

• Self-liquidating loans

• Bridging loans

Which of the following are CORRECT about short term loan?

I. Use future earnings/cash flows to repay

II. To support working capital requirement

III. To bridge long-term loans/borrowing

IV. To finance capital investment.

V. Mostly secured by pledged collateral.

• I and V only

• II and III only

• II, III, IV only

• I, II and III only

Revolving credit is more expensive than term loan, but why do some businesses still borrow revolving credit?