5.

If the required compensating balance is larger than the transactions balance the
firm would ordinarily hold, then the effective cost of any loan requiring such a
balance is:

a. increased.

b. unchanged

c. decreased

Being required to hold a balance larger than normal practices suggest increases the
cost to the firm. The firm must obtain those funds (at a cost to the firm) and keep
the funds as compensating balances that earn no return.

6. Which of the following are factors that should be considered when choosing a
bank?

a. willingness to assume risks

b. loyalty to customers

c. specialization of loans

d. all of the above are correct

e. none of the above

Willingness to assume risks, loyalty to customers, and specialization of loans, are all
factors that should be considered when choosing a bank

7. A(n) ______________ is an informal agreement between a bank and a borrower

indicating the maximum credit the bank will extend to the borrower.

a. trade credit

b. compensating balance

c. promissory note

d. information line of credit

A line of credit is an informal agreement between a bank and a borrower indicating
the maximum credit the bank will extend to the borrower.

8. Your firm buys on credit terms of 2/10, net 30 days, and it always pays on Day 30.
If you calculate that this policy costs your firm $300,000 each year, what is the firms
average accounts payable balance?

a. $342,098

b. $492,925

c. $721,934

d. $805,479

Nominal annual percentage cost = [(discount % )/(100 discount %)] X [(365)/(days

credit is outstanding discount period)]; Total annual cost = (percentage cost)
(average accounts receivable balance)

9. You plan to borrow $10,000 from your bank, which offers to lend you the money
at a 10 percent nominal, or stated, rate on a one-year loan. What is the effective
interest rate if the loan is a discount loan?

a. 10%

b. 11.11%

c. 12.45%

d. 14.56%

Since this is a one year loan: Effective rate = (face amount)/(funds received) 1

10. Your bank offers to lend you money at a 10 percent nominal, or stated, rate on a
one-year loan. The loan is a discount loan. How much would you have to borrow to
have the use of $10,000?

a. $10,000

b. $11,111
 c. $13,456

d. $16,543

We know that the funds received equal the face amount minus the interest rate
times the face amount. If we enter the funds we wish to receive and the interest rate,
we can solve for the face amount needed.