BUSI 320 TERM 1 EXAM Questions and Answers
Verified Solutions Latest Update
Question 1.
Jones Company borrows $125,000 (net) from First National Bank. The bank requires
a 20% compensating balance. What is the gross amount of the loan?
Correct Answer: $156,250 During tight money periods most banks charge
Blank______ the prime rate. more than What
does LIBOR indicate?
It is the rate that most international banks charge one another for dollar
denominated loans in the
London market.
True or false: In the last decade there has been a sharp decline in the use of the
term loan False
Question 2.
Commercial banks use money from their customers' checking accounts to offer
Blank______ that provide short-term financial capital to businesses, and to finance
consumer purchases of durable goods such as automobiles.
Correct Answer: funds loans A compensating balance requirement is similar to a
Blank______ requirement. minimum
balance
Question 3.
Jones Company borrows $125,000 from First National Bank. The bank requires a
10% compensating balance. Which of the following are true regarding this loan?
Correct Answer: Jones will pay interest on $125,000 Jones will have use of
$112,500 If the bank uses a _____ loan and
deducts the interest in advance, the effective rate of interest _____. Discounted
increases
Question 4.
Bankers can oftentimes be hesitant to allow a term loan to affix to a single rate.
Rather,
they prefer the interest rate to change with _ _.
Correct Answer: market Blank 2: conditions
Question 5.
An individual borrows $1,000 from the bank for one year from the bank. The loan
requires equal monthly payments. The loan officer states the total interest will be
$60. The
effective rate on the loan will be
Correct Answer: more than 6%
, Question 6.
Ezze Mattress needs to raise $200,000 for 6 months. The bank quotes a discount
interest rate of 7.5% but does not require compensating balances. What is the
effective
annual interest rate on this loan?
Correct Answer: 7.79% Reason: $7,500/($200,000-$7,500)*360/180 = 7.79%
Question 7.
Calculate the interest rate with compensating balance given annual interest rate of
20
percent and a compensating balance of 4 percent.
Correct Answer: 20.83 percent
Question 8.
Calculate the effective interest rate (APR) on a 6-month loan of $6,000 at a 10
percent
interest rate (discount basis).
Correct Answer: 10.53% Reason: = ($6,000 x 10% x ()) / (($6,000 - 300) x ())
= 10.53% An installment loan
usually requires
- payment of accrued interest & part principal.
- a series of equal payments. The 1968 Truth in Lending Act was intended to
protect: Individual
borrowers To combat inflation, the Federal Reserve sometimes will tighten the
money supply.
Compensating balances (do or don't) earn interest. don't
Question 9.
A firm borrows $100,000 at 10 percent annual interest plus a 5 percent
compensating
balance requirement. As a result, the effective interest rate is Blank______ percent.
Correct Answer: 10.53 Reason: (.1 x $100,000)/[$100,000 x (1 - .05)] = 10.53%
Installment loans are a cheaper
alternative to credit cards because: their interest rates are often lower than credit
card rates. they are
cheaper over many months or years when an extended payment period is needed.
Commercial paper is backed by the name and reputation of the issuing company.
Question 10.
True or false: Because there are so many ways to structure loan repayment
schedules,
no one formula is applicable for computing the APR
Correct Answer: True Reason: Because there are so many ways to structure loan
repayment schedules, no one formula
is applicable for computing the APR
Commercial paper is traded in the Blank______. money markets Credit crunch are
Verified Solutions Latest Update
Question 1.
Jones Company borrows $125,000 (net) from First National Bank. The bank requires
a 20% compensating balance. What is the gross amount of the loan?
Correct Answer: $156,250 During tight money periods most banks charge
Blank______ the prime rate. more than What
does LIBOR indicate?
It is the rate that most international banks charge one another for dollar
denominated loans in the
London market.
True or false: In the last decade there has been a sharp decline in the use of the
term loan False
Question 2.
Commercial banks use money from their customers' checking accounts to offer
Blank______ that provide short-term financial capital to businesses, and to finance
consumer purchases of durable goods such as automobiles.
Correct Answer: funds loans A compensating balance requirement is similar to a
Blank______ requirement. minimum
balance
Question 3.
Jones Company borrows $125,000 from First National Bank. The bank requires a
10% compensating balance. Which of the following are true regarding this loan?
Correct Answer: Jones will pay interest on $125,000 Jones will have use of
$112,500 If the bank uses a _____ loan and
deducts the interest in advance, the effective rate of interest _____. Discounted
increases
Question 4.
Bankers can oftentimes be hesitant to allow a term loan to affix to a single rate.
Rather,
they prefer the interest rate to change with _ _.
Correct Answer: market Blank 2: conditions
Question 5.
An individual borrows $1,000 from the bank for one year from the bank. The loan
requires equal monthly payments. The loan officer states the total interest will be
$60. The
effective rate on the loan will be
Correct Answer: more than 6%
, Question 6.
Ezze Mattress needs to raise $200,000 for 6 months. The bank quotes a discount
interest rate of 7.5% but does not require compensating balances. What is the
effective
annual interest rate on this loan?
Correct Answer: 7.79% Reason: $7,500/($200,000-$7,500)*360/180 = 7.79%
Question 7.
Calculate the interest rate with compensating balance given annual interest rate of
20
percent and a compensating balance of 4 percent.
Correct Answer: 20.83 percent
Question 8.
Calculate the effective interest rate (APR) on a 6-month loan of $6,000 at a 10
percent
interest rate (discount basis).
Correct Answer: 10.53% Reason: = ($6,000 x 10% x ()) / (($6,000 - 300) x ())
= 10.53% An installment loan
usually requires
- payment of accrued interest & part principal.
- a series of equal payments. The 1968 Truth in Lending Act was intended to
protect: Individual
borrowers To combat inflation, the Federal Reserve sometimes will tighten the
money supply.
Compensating balances (do or don't) earn interest. don't
Question 9.
A firm borrows $100,000 at 10 percent annual interest plus a 5 percent
compensating
balance requirement. As a result, the effective interest rate is Blank______ percent.
Correct Answer: 10.53 Reason: (.1 x $100,000)/[$100,000 x (1 - .05)] = 10.53%
Installment loans are a cheaper
alternative to credit cards because: their interest rates are often lower than credit
card rates. they are
cheaper over many months or years when an extended payment period is needed.
Commercial paper is backed by the name and reputation of the issuing company.
Question 10.
True or false: Because there are so many ways to structure loan repayment
schedules,
no one formula is applicable for computing the APR
Correct Answer: True Reason: Because there are so many ways to structure loan
repayment schedules, no one formula
is applicable for computing the APR
Commercial paper is traded in the Blank______. money markets Credit crunch are
