In addition international loans can be used to

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Unformatted text preview: ble to firms of all sizes; commercial paper tends to be available only to large firms. In addition, international loans can be used to finance international transactions. Bank Loans short-term, self-liquidating loan An unsecured short-term loan in which the use to which the borrowed money is put provides the mechanism through which the loan is repaid. Banks are a major source of unsecured short-term loans to businesses. The major type of loan made by banks to businesses is the short-term, self-liquidating loan. These loans are intended merely to carry the firm through seasonal peaks in financing needs that are due primarily to buildups of inventory and accounts receivable. As inventories and receivables are converted into cash, the funds needed to retire these loans are generated. In other words, the use to which the borrowed money is put provides the mechanism through which the loan is repaid—hence the term self-liquidating. Banks lend unsecured, short-term funds in three basic ways: through single-payment notes, lines of credit, and revolving 642 PART 5 Short-Term Financial Decisions credit agreements. Before we look at these types of loans, we consider loan interest rates. Loan Interest Rates prime rate of interest (prime rate) The lowest rate of interest charged by leading banks on business loans to their most important business borrowers. fixed-rate loan A loan with a rate of interest that is determined at a set increment above the prime rate and at which it remains fixed until maturity. floating-rate loan A loan with a rate of interest initially set at an increment above the prime rate and allowed to “float,” or vary, above prime as the prime rate varies until maturity. The interest rate on a bank loan can be a fixed or a floating rate, typically based on the prime rate of interest. The prime rate of interest (prime rate) is the lowest rate of interest charged by leading banks on business loans to their most important business borrowers.3 The prime rate fluctuates with changing supply-anddemand relationships for short-term funds.4 Banks generally determine the rate to be charged to various bor...
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This document was uploaded on 01/19/2014.

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