Chapter 09 - Short-term Debt

1. When a company finances its short-term assets with short-term debt, this is known as the: 
 

A. identical principle.
B. equalisation theory.
C. corresponding principle.
D. matching principle.
 
2. Trade credit can be regarded as: 
 

A. finance offered by trading banks.

B. short-term debt.
C. medium-term debt.
D. long-term debt.
 

3. According to the text, short-term debt arrangements means loans and instruments with maturity: 
 

A. of a month.
B. up to six months.
C. up to a year.
D. between one year and two years.
 
4. When a company provides goods to a purchaser with payment at the end of the month, this is called. 
 

A. factoring.
B. revolving credit.
C. trade credit.
D. supplier credit.
 
5. A facility offered by many suppliers of goods that provide for the purchase of goods with a specified
period before the account must be paid for is called: 
 

A. supplier credit.
B. bank overdraft.
C. trade credit.
D. purchaser credit.
 
6. Which financial security is known as one-name paper? 
 

A. Bank bills
B. CDs
C. Promissory notes
D. Unsecured notes

7. Commercial paper is usually issued in multiples of: 

 

A. $1000 or more
B. $10 000 or more
C. $100 000 or more
D. $1 000 000 or more

8. Commercial paper is generally sold at a discount from: 

 

A. the prime rate.

B. its face value.
C. its cost.
D. Treasury notes.

 
 
 
9. A supplier who changes its trade credit from 3/10 n/30 to 4/15 n/40 is likely to find: 
 

A. its accounts receivable decrease.

B. its risk of bad debts reduces.
C. its accounts receivable increase.
D. a decrease in sales.
 

10. When a business wants to smooth out the timing of its monthly mismatch between cash inflows and
outflows and day-to-day working capital requirements, it usually: 
 

A. issues bank bills.

B. arranges a bank overdraft facility.
C. issues a debenture.
D. issues commercial paper.
 

11. When a company has a deal with a bank lender that allows access to short-term funds, this is called: 
 

A. a debt facility.
B. a credit facility.
C. a debt provision.
D. a liability provision.
 

12. Which of the following statements about an overdraft facility is NOT correct? 
 

A. Banks require an overdraft facility to be operated on a fully fluctuating basis.

B. Generally, the agreed interest rate on an overdraft is calculated by the bank on the balance at the end
of the month.
C. The bank lender will charge an establishment fee to cover the establishment costs of an overdraft.
D. There is an unused limit fee that is much less than the actual overdraft interest rate.
 
13. The ________ is the benchmark rate of interest charged on loans to a business borrower by a bank. 
 

A. prime rate
B. commercial paper rate
C. Treasury rate
D. overdraft rate
 

14. The benchmark or prime rate of interest for overdrafts varies directly with: 
 

A. demand for funds in the bond markets.

B. varying demand and supply for funds in the short-term markets.
C. varying demand and supply for funds in the long-term markets.
D. changing asset prices.
 

15. The basic feature of a/an ________ required by some banks is that it effectively raises the interest cost
to the borrower for an overdraft facility. 
 

A. operating change restriction

B. compensating balance
C. commitment fee
D. annual cleanup
 

16. If a company has a good credit standing with a bank, it will be charged ______ interest rate margin
than/as a company without an established record. 
 

A. a higher
B. a lower
C. a much higher
D. the same
 
17. Which of the following statements about bank bills is NOT correct? 
 

A. The interest rate on a bank bill is generally higher than on a bank overdraft.
B. The interest rate on a bank bill is generally lower than the yield on a Treasury note.
C. The interest rate on a bank overdraft is generally higher than the yield on a Treasury note.
D. The interest rate on a bank overdraft is generally higher than the yield on a Treasury bond.
 

18. If a company wishes to finance a printing press with a two-year life, it would be advisable to finance it: 
 

A. with an overdraft.
B. by issuing a bank bill.
C. with the issue of commercial paper.
D. through its bill rollover facility.
 

19. A company is likely to issue a bank bill if it wants: 

 

A. long-term financing.
B. to spread its interest payments over the medium term.
C. short-term financing.
D. to invest medium-term funds.
 

20. Which of the following rates serves as a reference interest rate in the United Kingdom? 
 

A. BBSW
B. LIBOR
C. USCP
D. SIBOR
 

21. What is a bill of exchange either accepted or endorsed by a bank called? 

 

A. A commercial bill
B. A bank bill
C. A trade bill
D. A negotiable bill
 
22. Which of the following statements about the issuing of a commercial bill is incorrect? 
 

A. Commercial bills are sold at discount to face value.

B. A bank may accept a commercial bill.
C. The drawer is the party that issues the commercial bill.
D. The discounter is the party that borrows the funds.
 

23. The _______ is the party that lends the funds in a commercial bill transaction. 
 

A. acceptor
B. discounter
C. drawer
D. endorser
 

24. Which of the following statements about bank bills is incorrect? 

 

A. The drawer is the party that issues the bill.

B. The acceptor is the party that has primary liability to repay the face value of the bill.
C. The payee is the party that receives the borrowed funds when the bill is initially issued.
D. The discounter is the party that repays the acceptor at maturity.
 

25. The process of discounting a commercial bill means: 

 

A. a buyer for the bill will provide the financing.

B. a seller for the bill will provide the financing.
C. the borrower has a specified time in which to repay the loan.
D. the acceptor agrees to pay the face value of the bill to the holder at maturity.
 

26. For a commercial bill, the interest rate is quoted as a/an: 

 

A. annual percentage rate.

B. rate based on its maturity.
C. effective rate.
D. holding period yield.
 
27. Which of the following about bank bills is incorrect? 
 

A. For a bank bill, the drawer has the secondary liability to pay the holder of the bill at maturity.
B. A commercial bank generally carries out the role of an acceptor on a bill.
C. With a bank as an acceptor, it makes it easier to sell the bill at a higher yield.
D. When the discounter discounts the face value of the bill they provide the funds to the borrower.
 

28. In relation to a commercial bill, the acceptance fee is the: 

 

A. discounter's fee for taking on the risks associated with discounting the bill.
B. fee for drawing up the bill.
C. fee for taking the liability for paying the holder at maturity.
D. drawer's fee for taking on the risks associated with drawing the bill.
 

29. Which of the following statements about bills is incorrect? 

 

A. There is an active secondary market in bank-accepted bills.

B. Once a bill has been discounted into the marketplace, the cost of funds will vary for the issuer.
C. The drawer has a liability with a bank-accepted bill to pay face value to the acceptor bank.
D. At maturity for a bank-accepted bill, the acceptor will pay face value to the holder.
 
30. When a party endorses a bank bill, it: 
 

A. repays the face value of the bill to the holder at maturity.

B. creates a liability for payment of the bill.
C. provides the funds to the seller.
D. provides the funds to the discounter of the bill.
 

31. Which of the following statements regarding a bank bill is correct? 

 

A. A bank bill is not usually endorsed after it is sold for the second time in the secondary market.
B. Once a bank becomes an acceptor for a bill other financial institutions can buy and accept the same
bank bill.
C. A bank bill may be both bank-accepted and bank-endorsed.
D. A bank-accepted bill tends to trade at slightly higher yields than bank-endorsed bills.
 
32. In relation to a bank bill, endorsement means: 
 

A. that the acceptor and endorser make an agreement as to who is liable for the repayment of the face
value to the final holder of the bill.
B. if the acceptor cannot repay the face value to the holder at maturity, it must draw a bill to meet its
obligations.
C. the endorser has a contingent liability when the bill matures.
D. the drawer agrees to pay an additional fee to the acceptor for guaranteeing the repayment.
 

33. Upon maturity, the final holder of the bill approaches the _________ for payment. 
 

A. drawer
B. acceptor
C. endorser
D. discounter
 

34. Which maturity date is NOT likely for a bank bill? 

 

A. 30 days
B. 90 days
C. 180 days
D. 360 days
 

35. With a bank-accepted bill rollover facility the: 

 

A. borrower agrees to accept bills drawn by the bank up to a specified limit.

B. borrower agrees to accept bills drawn by the bank up to an unspecified limit.
C. bank agrees to accept bills drawn by the borrower up to a specified limit.
D. The bank agrees to accept, discount and rollover bills at a fixed interest rate up to a year.
 
36. A major advantage of a bill financing facility is that it: 
 

A. lowers the acceptor's fees for a bank bill.

B. lowers the drawer's cost in drawing up the bill.
C. allows businesses to access financing at a lower cost than overdrafts.
D. lowers the discounter's fee for taking on risks associated with the bill.
 

37. Which of the following about bank bill financing facility is incorrect? 
 

A. A bill rollover facility is an arrangement whereby the bank agrees to accept and discount new
commercial bills for an issuer at each maturity date.
B. The yield at which the bill is discounted depends partly on the credit rating of the party that incurs
the liability.
C. The bank agrees to discount bills up to the agreed amounts with a fixed yield over the life of the
rollover facility.
D. Bills issued via a rollover facility incorporate the higher credit standing of the bank acceptor.
 

38. With regard to a rollover bill financing facility: 

 

A. the bank agrees to sell commercial bills drawn by the borrower for unspecified amounts.
B. the bank agrees to sell commercial bills drawn by the borrower up to a specified limit.
C. the discounter agrees to sell commercial bills drawn by the borrower up to a specified limit.
D. none of the given answers are correct.
 

39. Compared to other forms of business finance such as term loans, bill financing offers: 
 

A. the advantages of lower costs for the bank not having to fund the bill on its balance sheet.
B. disadvantages for the bank due to the issue fees involved.
C. higher costs due to the lack of collateral.
D. lower flexibility for the bank.
 
40. Which of the following statements is correct? 
 

A. A bank bill is a negotiable instrument.

B. A bank-accepted bill is regarded by market participants as equivalent to a bank-endorsed bill.
C. The issuer of the bank-accepted bill will repay the holder of the bill directly at maturity.
D. The issuer of a bank-endorsed bill has to pay regular interest payments to the holder, unlike with a
bank-accepted bill.
 
41. A company issues a 90-day bill with a face value of $100 000, yielding 7.65% per annum. What amount
would the company raise on the issue? 
 

A. $84 130.46
B. $92 350.21
C. $98 123.39
D. $98 148.62
 
42. A holder of a 180-day bill with 60 days left to maturity and a face value of $100 000 chooses to sell it
into the market. If 60-day bills are currently yielding 6.8% per annum, what price will be obtained? 
 

A. $81 728.61
B. $89 945.79
C. $97 813.27
D. $98 894.55
 
43. A company has decided to issue a 120-day bank-accepted bill to raise additional funding of $250 000 to
buy equipment. If the bank has agreed to discount the bill at a yield of 7.65% per annum, what will be
the face value of the bill? 
 

A. $230 875
B. $250 000
C. $256 287.67
D. $312 876.71
 
44. A company wants to invest some surplus short-term funds and plans to buy a 180-day bank bill with a
face value of $100 000. What is the yield on the bill if its price is currently $94 234? 
 

A. 11.69%
B. 12.41%
C. 13.23%
D. 13.32%
 
45. What is the discount rate of a 120-day bank bill with a face value of $100 000 and currently selling for
$95 234, with a full 120 days to run? 
 

A. 13.93%
B. 14.50%
C. 15.22%
D. 16.58%
 
46. A bill of exchange differs from a promissory note in that: 
 

A. only promissory notes have an active secondary market.

B. a promissory note is a short-term instrument, whereas a bill of exchange is not necessarily short-
term.
C. there is generally an issuer and an acceptor for a bill of exchange, whereas there is no acceptor
involved for a promissory note.
D. bills of exchange are only used for trade transactions.
 
47. Promissory notes have a decided advantage over bills in that: 
 

A. they are liquid.

B. an issuer of a promissory note does not incur a contingent liability.
C. a borrower without a strong name in the markets does not need bank endorsement.
D. sole liability to repay the face value at maturity belongs to the underwriting bank(s).
 
48. ________ is a short-term, unsecured discount note issued by corporate borrowers of high credit
standing. The major banks generally issue these notes on their behalf. 
 

A. A line of credit
B. Commercial paper
C. A revolving line of credit
D. A fully drawn advance
 
49. Which of the following statements about promissory notes is incorrect? 
 

A. Promissory notes are discount securities.

B. P-notes are issued by corporations in all the major international financial markets.
C. P-notes have no acceptor, only an endorser.
D. P-notes are usually issued as unsecured instruments.