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Unformatted text preview: CHAPTER TWENTY Multiple Choice Questions 20-1. Calculate the effective annual interest rate of foregoing the discount and paying on the 30 th day when the terms are 2/cash, n 30. Use a 365-day year: a. 30.13% b. 27.86% c. 25.78% d. 29.77% 20-2. Which of the following is a major problem with using inventory for collateral for short-term loans? a. high costs b. locating lenders c. factoring d. valuing the inventory 20.3. Discount interest ______ the effective annual interest rate on a loan while compensating balances ______ it. a. decreases; decreases b. decreases; increases c. increases; increases d. increases; decreases 20-4. The primary disadvantage of relying on short-term credit for continuous financing needs is: a. the risk of increasing interest rates b. the higher interest rates c. the time it takes to arrange for it as compared to long-term financing d. banks dont like to lend short-term 20-5. Which of the following types of loans will require you to borrow the highest amount in order to obtain the use of $4,000? a. simple interest b. discount interest c. discount interest with a 5% compensating balance d. they will all allow you to obtain $4,000 248 20-6. Short-term financing is normally cheaper than long-term financing because it: a. is less risky for the borrower b. has interest costs which are certain c. has fewer transaction costs d. usually has lower interest rates 20-7. The amount of financing sought is least influenced by which of the following? a. availability of funds b. cost of funds c. the Federal Reserve district where the firm is located d. investment opportunities 20-8. For short-term funding (less than a year), firms usually use all but which of the following? a. bonds b. trade credit c. commercial paper d. revolving line of credit 20-9. The effective annual interest rate of a loan: a. is equal to the nominal rate b. equals the nominal annual rate divided by the number of compounding periods per year c. is higher than the nominal annual rate if there is compounding more than one time per year d. is lower than the nominal annual rate if there is compounding more than one time per year 20-10. Which of the following is the type of short-term loan banks most like to make to a borrower with seasonal financing needs?...
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This note was uploaded on 01/21/2011 for the course ACC 452 taught by Professor Mr.cula during the Spring '10 term at Abraham Baldwin Agricultural College.
- Spring '10