ch9

Student: ___________________________________________________________________________

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. 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
4. A 2/15, n/30 date of invoice translates as:
A a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in
. 30 days after the middle of the month
B.a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30
days after the invoice date
C a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30
. days after the end of the month
D. a 2% cash discount may be taken on 15% of the purchase if the account is paid within 30 days after the
end of the month
5. The annual cost of forgoing a cash discount under the terms of sale 2/30 n/90, assuming a 365-day year
is:
A. 8.0%
B. 12.2%
C. 12.4%
D. 24.0%
6. A company is offered credit terms of 2/10 n/40, but decides to forgo the cash discount and pay on the
45th day. What is the company's cost of forgoing the cash discount?
A. 18.6%
B. 21.28%
C. 24.83%
D. None of the given answers.
7. 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
8. 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 an overdraft facility
C. issues a debenture
D. issues commercial paper
9. 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
10. 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
11. 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
12. 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
13. If a company has 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
14. Which of the following statements about bank bills is INCORRECT?
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.
15. If a company wishes to finance a printing press with a two-year life, it would be advisable to finance it
with a/an:
A. overdraft
B. bank bill
C. commercial paper
D. cash advance facility
16. 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
17. Which of the following rates serves as a reference interest rate in the United Kingdom?
A. BBSW
B. LIBOR
C. USCP
D. SIBOR
18. 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
19. Which of the following statements about the issuing of a commercial bill is FALSE?
A. They are sold at discount to face value.
B. A bank may accept them.
C. The drawer is the party that issues the bill.
D. The discounter is the party that borrows the funds.
20. The _______ is the party that lends the funds in a commercial bill transaction.
A. acceptor
B. discounter
C. drawer
D. endorser
21. 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
22. For a commercial bill, the interest rate is quoted as a/an:
A. annual percentage rate
B. compounded annual rate
C. effective rate
D. holding period yield
23. 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
24. 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.
25. 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
26. Which of the following statements regarding a bank bill is correct?
A. It is not usually endorsed after it is sold for the second time in the secondary market.
B. Other financial institutions can accept bank bills.
C. It may be both bank-accepted and bank-endorsed.
D. A bank-accepted bill tends to trade at a slightly deeper discount than bank-endorsed bills.
27. 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
28. Upon maturity, the final holder of the bill approaches the _________ for payment.
A. drawer
B. acceptor
C. endorser
D. discounter
29. Which maturity date is NOT likely for a bank bill?
A. 30 days
B. 90 days
C. 180 days
D. 360 days
30. 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. None of the given answers.
31. 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
32. With regard to a rollover bill financing facility the:
A. bank agrees to sell commercial bills drawn by the borrower for unspecified amounts
B. bank agrees to sell commercial bills drawn by the borrower up to a specified limit
C. discounter agrees to sell commercial bills drawn by the borrower up to a specified limit
D. None of the given answers.
33. 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.
34. 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
35. 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
36. 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
37. 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 the price on the bill is currently $94 234?
A. 11.69%
B. 12.41%
C. 13.23%
D. 13.32%
38. 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%
39. 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 one
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
40. 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)
41. ________ 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
42. 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
43. Commercial paper is generally sold at a discount from:
A. the prime rate
B. its face value
C. its cost
D. Treasury notes
44. Which one of the following statements is true?
A. Promissory notes are sold with contingent liability in the secondary market.
B. Both commercial bills and promissory notes are sold with contingent liability in the secondary market.
C Commercial bills are sold with contingent liability in the secondary market, whereas promissory notes
. are sold without contingent liability.
D. Promissory notes and commercial bills are both sold without contingent liability in the secondary
market.
45. Which one of the following statements is true?
A. As a promissory note is a one-name paper, only the buyer is required to endorse it.
B. If a bank agrees to accept it, a corporation can issue a promissory note.
C. Usually, initial buyers of promissory notes hold them until maturity.
D. Typically, a promissory note will be issued for 90 days.
46. Which of the following is NOT a feature of promissory notes?
A. They are issued at discount to face value.
B. A typical P-note facility issue program is a revolving facility.
C. A company may pay an additional fee to the underwriter for endorsing the issue.
D. Only the largest and most creditworthy corporations issue them.
47. Compared with bill financing, commercial paper financing offers a large company:
A. higher costs because of the need for collateral
B. higher costs owing to the acceptance fee involved
C. lower costs owing to no contingent liability when sold on
D. lower costs owing to lower bank fees
48. When compared with bank bills, commercial paper has the advantage:
A. that no interest is paid until maturity, unlike for a bank bill
B. that a holder of commercial paper has no contingent liability when selling in the money markets
C. that an issue of commercial paper often has a rollover facility attached, unlike for bank bills
D. of greater liquidity in the secondary market
49. The term 'discount security' in relation to a bank bill means:
A. when the bank bill is issued, it is less than the principal amount to be repaid at maturity
B. the interest on a bank bill is less than other money market securities
C. when the principal is repaid to the lender, they receive less than other money market securities
D. the bank bill only pays interest annually, unlike other securities that pay semi-annually
50. When issuing commercial paper, it is important for a company to have:
A. a party to act as an acceptor and guarantee payment
B. collateral to attach to the issue
C. a well-established reputation in the markets
D. investors organised by the investment bankers to sell the issue
51. When underwriting a commercial paper issue, an investment bank's fee will usually be:
A. 10% per annum
B. 1% per annum
C. 0.1% per annum
D. 0.01% per annum
52. A commercial paper issue where dealers bid competitively for the paper is a/an:
A. tap issuance
B. tender
C. offer
D. proposition
53. Where a company wants to guarantee all of its issue of commercial paper, it can arrange for it to be:
A. sold by tender
B. underwritten
C. sold by tap
D. sold with a face value less than $10 000
54. The most important function of an underwriter for a promissory note issue is to:
A. provide funding for the corporation
B. approve the prospectus before distribution to the public
C. dilute the corporation's equity
D. buy the issue of securities from the corporation and resell it to investors
55. One of the advantages to the corporation of an underwriting syndicate for the issue of promissory notes
is:
A. they approve the prospectus before distribution to the public
B. the syndicate submits a combined bid for purchase that the corporation compares with other bids
C. the syndicate monitors and coordinates the actions of the different underwriters
D. the underwriting commitment gives the corporation access to a line of credit extending beyond the life
of the promissory note
56. A company has directly placed an issue of commercial paper that has a maturity of 90 days, with a face
value of $100 000 yielding 8.25% per annum. What amount would the company raise on the issue?
A. $83 096.19
B. $91 750.00
C. $97 965.75
D. $98 006.31
57. As an alternative to issuing a commercial bill for short-term financing, corporations with an excellent
credit standing may:
A. buy commercial paper
B. issue commercial paper
C. issue preference shares
D. issue convertible notes
58. A revolving facility for a promissory note issue usually:
A. has a lead manager to organise the issuance
B. offers corporations funding for 180 days
C. gives the issuer the right to cancel the program, subject to 90 days' notice
D. has only an underwriter
59. The role of a lead manager for a promissory note issuance program is to:
A. provide the funds to the issuer
B. act as an arranger of the debt issue
C. act as an underwriting syndicate and purchase paper not taken up by the market
D. provide a supporting guarantee for the issue
60. The interest rate charged on an unsecured short-term loan to a company is generally ________ the
interest rate on a secured loan.
A. lower than
B. the same as
C. higher than
D. unrelated to
61. When an issuer of commercial paper issue fails to raise the funds, this most likely means the:
A. company is in default
B. issue is underpriced
C. underwriter must purchase unsold notes
D. issuer must establish a rollover facility for the remaining notes
62. As part of their liability management, banks sell which financial instrument?
A. Bank bill
B. Commercial paper
C. Certificate of deposit
D. Promissory note
63. As an alternative to issuing a commercial bill for short-term funds, a corporation may:
A. buy a promissory note
B. issue a convertible note
C. use the cash advance facility of an investment bank
D. issue a negotiable certificate of deposit
64. The major banks lend unsecured short-term funds in the following three basic ways:
A. overdraft, bill financing, commercial paper
B. overdraft, bill financing, fully drawn advances
C. overdraft, commercial paper, cash advances
D. commercial paper, negotiable certificates of deposit, overdraft
65. Negotiable certificates of deposit:
A. pay interest, as they are interest-bearing accounts at a bank
B. are short-term securities, issued by banks for financing purposes
C. have a longer maturity date than promissory notes
D. have little liquidity in the secondary market
66. A negotiable certificate of deposit:
A. is a term deposit because it has a specified maturity date
B. can be issued by banks to meet their operational liquidity
C. is a short-term discount security
D. All of the given answers.
67. If a company wished to invest funds in the short term, it could:
A. issue a commercial bill
B. issue a promissory note
C. buy a negotiable certificate of deposit
D. buy a promissory note
68. Most agreements involving factoring of accounts receivable are made on a _______ basis.
A. non-recourse
B. notification
C. recourse
D. non-notification
69. Which of the following is NOT an advantage of factoring?
A. Known cash flows are generated.
B. Accounts receivable is turned into cash without delay.
C. The credit and collection department of a company may be eliminated.
D. The cost of financing is relatively high.
70. Which one of the following statements regarding factoring is correct?
A. Some banks and bank subsidiaries may provide factoring.
B Under with-recourse factoring, when a customer makes a payment the factoring company passes the
. money on to the company minus a handling fee.
C. The discount charged by the factoring company is approximately equal to the rate charged on a secured
overdraft loan.
D With non-recourse factoring, the company cannot sell additional accounts receivable to the factoring
. company after the initial amount.
71. A bank that provides an overdraft facility to business customers expects the overdraft to have a
fluctuating balance and doesn't require the customer to have the account in credit at any stage.
True False
72. One of the advantages of an overdraft facility, from the viewpoint of a borrower, is it can be used to
smooth out any seasonal mismatch between its cash inflows and outflows.
True False
73. Commercial bills are a category of bills of exchange that are issued by commercial banks.
True False
74. The return on a commercial bill for a holder at its maturity is the difference between its discounted
purchase price and the face value of the bill.
True False
75. With a bank-accepted bill the drawer has a secondary liability after the acceptor to pay the holder of the
bill the face value of the bill at the maturity date.
True False
76. The initial discounter of a commercial bill is the issuer of the bill who receives the funds.
True False
77. The acceptor of a commercial bill undertakes to pay the face value of the bill to the holder at
maturity.
True False
78. The market for bank-accepted bills is an illiquid one as banks tend to hold them until maturity.
True False
79. A major advantage of bill financing over other forms of short-term debt such as overdrafts is that the cost
is usually lower.
True False
80. Commercial paper securities are unsecured promissory notes, issued by corporations, which generally
mature within 180 days.
True False
81. In establishing an overdraft facility with a company, what are some of the firm-related factors a bank will
consider?

82. Discuss what factors influence the yield at which a commercial bill will be discounted.
83. What are some of the advantages of bill financing for a company over other forms of short-term debt?

84. What are some advantages of promissory notes financing for a large company?

85. Negotiable certificates of deposit are short-term securities issued by banks. Discuss their uses.
 ch9 Key
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
Difficulty: Easy
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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
Difficulty: Easy
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3. 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
Difficulty: Easy
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4. A 2/15, n/30 date of invoice translates as:
A a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due
. in 30 days after the middle of the month
B. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due
30 days after the invoice date
C. a 2% cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due
30 days after the end of the month
D. a 2% cash discount may be taken on 15% of the purchase if the account is paid within 30 days after
the end of the month
Difficulty: Medium
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5. The annual cost of forgoing a cash discount under the terms of sale 2/30 n/90, assuming a 365-day
year is:
A. 8.0%
B. 12.2%
C. 12.4%
D. 24.0%
Difficulty: Medium
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6. A company is offered credit terms of 2/10 n/40, but decides to forgo the cash discount and pay on the
45th day. What is the company's cost of forgoing the cash discount?
A. 18.6%
B. 21.28%
C. 24.83%
D. None of the given answers.
Difficulty: Medium
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7. 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
Difficulty: Medium
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8. 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 an overdraft facility
C. issues a debenture
D. issues commercial paper
Difficulty: Easy
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9. 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
Difficulty: Easy
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10. 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
Difficulty: Easy
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11. 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
Difficulty: Easy
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12. 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
Difficulty: Hard
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13. If a company has 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
Difficulty: Easy
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14. Which of the following statements about bank bills is INCORRECT?
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.
Difficulty: Medium
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15. If a company wishes to finance a printing press with a two-year life, it would be advisable to finance it
with a/an:
A. overdraft
B. bank bill
C. commercial paper
D. cash advance facility
Difficulty: Medium
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16. 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
Difficulty: Easy
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17. Which of the following rates serves as a reference interest rate in the United Kingdom?
A. BBSW
B. LIBOR
C. USCP
D. SIBOR
Difficulty: Easy
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18. 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
Difficulty: Easy
Viney - Chapter 09 #18
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19. Which of the following statements about the issuing of a commercial bill is FALSE?
A. They are sold at discount to face value.
B. A bank may accept them.
C. The drawer is the party that issues the bill.
D. The discounter is the party that borrows the funds.
Difficulty: Medium
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20. The _______ is the party that lends the funds in a commercial bill transaction.
A. acceptor
B. discounter
C. drawer
D. endorser
Difficulty: Medium
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21. 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
Difficulty: Medium
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22. For a commercial bill, the interest rate is quoted as a/an:
A. annual percentage rate
B. compounded annual rate
C. effective rate
D. holding period yield
Difficulty: Medium
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23. 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
Difficulty: Medium
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24. 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.
Difficulty: Medium
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25. 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
Difficulty: Easy
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26. Which of the following statements regarding a bank bill is correct?
A. It is not usually endorsed after it is sold for the second time in the secondary market.
B. Other financial institutions can accept bank bills.
C. It may be both bank-accepted and bank-endorsed.
D. A bank-accepted bill tends to trade at a slightly deeper discount than bank-endorsed bills.
Difficulty: Medium
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27. 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
Difficulty: Medium
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28. Upon maturity, the final holder of the bill approaches the _________ for payment.
A. drawer
B. acceptor
C. endorser
D. discounter
Difficulty: Easy
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29. Which maturity date is NOT likely for a bank bill?
A. 30 days
B. 90 days
C. 180 days
D. 360 days
Difficulty: Medium
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30. 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. None of the given answers.
Difficulty: Medium
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31. 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
Difficulty: Medium
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32. With regard to a rollover bill financing facility the:
A. bank agrees to sell commercial bills drawn by the borrower for unspecified amounts
B. bank agrees to sell commercial bills drawn by the borrower up to a specified limit
C. discounter agrees to sell commercial bills drawn by the borrower up to a specified limit
D. None of the given answers.
Difficulty: Hard
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33. 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.
Difficulty: Medium
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34. 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
Difficulty: Medium
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35. 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
Difficulty: Medium
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36. 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
Difficulty: Medium
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37. 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 the price on the bill is currently $94 234?
A. 11.69%
B. 12.41%
C. 13.23%
D. 13.32%
Difficulty: Medium
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38. 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%
Difficulty: Medium
Viney - Chapter 09 #38
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39. 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 one
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
Difficulty: Easy
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40. 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)
Difficulty: Easy
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41. ________ 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
Difficulty: Easy
Viney - Chapter 09 #41
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42. 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
Difficulty: Hard
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43. Commercial paper is generally sold at a discount from:
A. the prime rate
B. its face value
C. its cost
D. Treasury notes
Difficulty: Easy
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44. Which one of the following statements is true?
A. Promissory notes are sold with contingent liability in the secondary market.
B. Both commercial bills and promissory notes are sold with contingent liability in the secondary
market.
C Commercial bills are sold with contingent liability in the secondary market, whereas promissory
. notes are sold without contingent liability.
D. Promissory notes and commercial bills are both sold without contingent liability in the secondary
market.
Difficulty: Easy
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45. Which one of the following statements is true?
A. As a promissory note is a one-name paper, only the buyer is required to endorse it.
B. If a bank agrees to accept it, a corporation can issue a promissory note.
C. Usually, initial buyers of promissory notes hold them until maturity.
D. Typically, a promissory note will be issued for 90 days.
Difficulty: Medium
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46. Which of the following is NOT a feature of promissory notes?
A. They are issued at discount to face value.
B. A typical P-note facility issue program is a revolving facility.
C. A company may pay an additional fee to the underwriter for endorsing the issue.
D. Only the largest and most creditworthy corporations issue them.
Difficulty: Medium
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47. Compared with bill financing, commercial paper financing offers a large company:
A. higher costs because of the need for collateral
B. higher costs owing to the acceptance fee involved
C. lower costs owing to no contingent liability when sold on
D. lower costs owing to lower bank fees
Difficulty: Medium
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48. When compared with bank bills, commercial paper has the advantage:
A. that no interest is paid until maturity, unlike for a bank bill
B. that a holder of commercial paper has no contingent liability when selling in the money markets
C. that an issue of commercial paper often has a rollover facility attached, unlike for bank bills
D. of greater liquidity in the secondary market
Difficulty: Medium
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49. The term 'discount security' in relation to a bank bill means:
A. when the bank bill is issued, it is less than the principal amount to be repaid at maturity
B. the interest on a bank bill is less than other money market securities
C. when the principal is repaid to the lender, they receive less than other money market securities
D. the bank bill only pays interest annually, unlike other securities that pay semi-annually
Difficulty: Easy
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50. When issuing commercial paper, it is important for a company to have:
A. a party to act as an acceptor and guarantee payment
B. collateral to attach to the issue
C. a well-established reputation in the markets
D. investors organised by the investment bankers to sell the issue
Difficulty: Easy
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51. When underwriting a commercial paper issue, an investment bank's fee will usually be:
A. 10% per annum
B. 1% per annum
C. 0.1% per annum
D. 0.01% per annum
Difficulty: Medium
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52. A commercial paper issue where dealers bid competitively for the paper is a/an:
A. tap issuance
B. tender
C. offer
D. proposition
Difficulty: Medium
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53. Where a company wants to guarantee all of its issue of commercial paper, it can arrange for it to
be:
A. sold by tender
B. underwritten
C. sold by tap
D. sold with a face value less than $10 000
Difficulty: Easy
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54. The most important function of an underwriter for a promissory note issue is to:
A. provide funding for the corporation
B. approve the prospectus before distribution to the public
C. dilute the corporation's equity
D. buy the issue of securities from the corporation and resell it to investors
Difficulty: Medium
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55. One of the advantages to the corporation of an underwriting syndicate for the issue of promissory
notes is:
A. they approve the prospectus before distribution to the public
B. the syndicate submits a combined bid for purchase that the corporation compares with other bids
C. the syndicate monitors and coordinates the actions of the different underwriters
D. the underwriting commitment gives the corporation access to a line of credit extending beyond the
life of the promissory note
Difficulty: Medium
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56. A company has directly placed an issue of commercial paper that has a maturity of 90 days, with a
face value of $100 000 yielding 8.25% per annum. What amount would the company raise on the
issue?
A. $83 096.19
B. $91 750.00
C. $97 965.75
D. $98 006.31
Difficulty: Medium
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57. As an alternative to issuing a commercial bill for short-term financing, corporations with an excellent
credit standing may:
A. buy commercial paper
B. issue commercial paper
C. issue preference shares
D. issue convertible notes
Difficulty: Easy
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58. A revolving facility for a promissory note issue usually:
A. has a lead manager to organise the issuance
B. offers corporations funding for 180 days
C. gives the issuer the right to cancel the program, subject to 90 days' notice
D. has only an underwriter
Difficulty: Medium
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59. The role of a lead manager for a promissory note issuance program is to:
A. provide the funds to the issuer
B. act as an arranger of the debt issue
C. act as an underwriting syndicate and purchase paper not taken up by the market
D. provide a supporting guarantee for the issue
Difficulty: Medium
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60. The interest rate charged on an unsecured short-term loan to a company is generally ________ the
interest rate on a secured loan.
A. lower than
B. the same as
C. higher than
D. unrelated to
Difficulty: Easy
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61. When an issuer of commercial paper issue fails to raise the funds, this most likely means the:
A. company is in default
B. issue is underpriced
C. underwriter must purchase unsold notes
D. issuer must establish a rollover facility for the remaining notes
Difficulty: Easy
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62. As part of their liability management, banks sell which financial instrument?
A. Bank bill
B. Commercial paper
C. Certificate of deposit
D. Promissory note
Difficulty: Medium
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63. As an alternative to issuing a commercial bill for short-term funds, a corporation may:
A. buy a promissory note
B. issue a convertible note
C. use the cash advance facility of an investment bank
D. issue a negotiable certificate of deposit
Difficulty: Easy
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64. The major banks lend unsecured short-term funds in the following three basic ways:
A. overdraft, bill financing, commercial paper
B. overdraft, bill financing, fully drawn advances
C. overdraft, commercial paper, cash advances
D. commercial paper, negotiable certificates of deposit, overdraft
Difficulty: Medium
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65. Negotiable certificates of deposit:
A. pay interest, as they are interest-bearing accounts at a bank
B. are short-term securities, issued by banks for financing purposes
C. have a longer maturity date than promissory notes
D. have little liquidity in the secondary market
Difficulty: Medium
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66. A negotiable certificate of deposit:
A. is a term deposit because it has a specified maturity date
B. can be issued by banks to meet their operational liquidity
C. is a short-term discount security
D. All of the given answers.
Difficulty: Medium
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67. If a company wished to invest funds in the short term, it could:
A. issue a commercial bill
B. issue a promissory note
C. buy a negotiable certificate of deposit
D. buy a promissory note
Difficulty: Medium
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68. Most agreements involving factoring of accounts receivable are made on a _______ basis.
A. non-recourse
B. notification
C. recourse
D. non-notification
Difficulty: Hard
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69. Which of the following is NOT an advantage of factoring?
A. Known cash flows are generated.
B. Accounts receivable is turned into cash without delay.
C. The credit and collection department of a company may be eliminated.
D. The cost of financing is relatively high.
Difficulty: Medium
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70. Which one of the following statements regarding factoring is correct?
A. Some banks and bank subsidiaries may provide factoring.
B Under with-recourse factoring, when a customer makes a payment the factoring company passes the
. money on to the company minus a handling fee.
C. The discount charged by the factoring company is approximately equal to the rate charged on a
secured overdraft loan.
D With non-recourse factoring, the company cannot sell additional accounts receivable to the
. factoring company after the initial amount.
Difficulty: Hard
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71. A bank that provides an overdraft facility to business customers expects the overdraft to have a
fluctuating balance and doesn't require the customer to have the account in credit at any stage.
FALSE

A borrower is expected to reduce or bring the overdraft into credit as and when future cash flows are
received by the company.

Difficulty: Medium
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72. One of the advantages of an overdraft facility, from the viewpoint of a borrower, is it can be used to
smooth out any seasonal mismatch between its cash inflows and outflows.
TRUE

Once the overdraft limit has been established a company may draw down the funds at any time
without notice.

Difficulty: Easy
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73. Commercial bills are a category of bills of exchange that are issued by commercial banks.
FALSE

Commercial bills are discount securities used by corporations to borrow short-term funds in the
money markets.

Difficulty: Easy
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74. The return on a commercial bill for a holder at its maturity is the difference between its discounted
purchase price and the face value of the bill.
TRUE

A commercial bill is a discount instrument where the return to the holder of the bill is the difference
between the discounted price and the face value at maturity.

Difficulty: Easy
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75. With a bank-accepted bill the drawer has a secondary liability after the acceptor to pay the holder of
the bill the face value of the bill at the maturity date.
TRUE

If the bill is dishonoured by the acceptor at maturity, the drawer has the responsibility to pay the bill
holder.

Difficulty: Medium
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76. The initial discounter of a commercial bill is the issuer of the bill who receives the funds.
FALSE

The discounter is the entity that provides the funds to the issuer of the bill, the drawer.

Difficulty: Medium
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77. The acceptor of a commercial bill undertakes to pay the face value of the bill to the holder at
maturity.
TRUE

The acceptor of the bill, that is a bank, pays the holder. Generally a bank has a separate arrangement
with the drawer, the original borrower, for them to repay the bank.

Difficulty: Easy
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78. The market for bank-accepted bills is an illiquid one as banks tend to hold them until maturity.
FALSE

The bank-accepted bill market is a very liquid part of the money markets.

Difficulty: Easy
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79. A major advantage of bill financing over other forms of short-term debt such as overdrafts is that the
cost is usually lower.
TRUE

A fundamental reason for the lower cost is that a bank does not have to fund the bill on its balance
sheet but can sell the bill into the money markets.

Difficulty: Medium
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80. Commercial paper securities are unsecured promissory notes, issued by corporations, which generally
mature within 180 days.
TRUE

Commercial paper are discount securities issued without an acceptor by large corporations with a high
credit rating.

Difficulty: Easy
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81. In establishing an overdraft facility with a company, what are some of the firm-related factors a bank
will consider?

A bank will consider a company's past financial performance and future cash flows, the length of the
typical mismatch between a company's cash inflows and outflows and the adequacy of the collateral
available in the case of default by the borrower.

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82. Discuss what factors influence the yield at which a commercial bill will be discounted.

The yield will be affected by factors that determine the general level of interest rates in the economy,
and then by the credit rating of the parties involved. A bank-accepted bill will include the higher credit
standing of the acceptor and so be able to be discounted at a lower yield than a bill issued by a drawer
of lower credit standing.

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83. What are some of the advantages of bill financing for a company over other forms of short-term debt?

First, a major advantage is usually it is of lower cost. Second, it provides a known cost of financing
for the borrower. It also offers considerable flexibility for the borrower; once they have drawn up a
bill facility, they can progressively issue bills over time.

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84. What are some advantages of promissory notes financing for a large company?

For a large company it can mean a lower cost of funding than using a bank bill facility as the
company does not incur bank bill fees, and the owner of a P-note can sell it without incurring a future
contingent liability.

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85. Negotiable certificates of deposit are short-term securities issued by banks. Discuss their uses.

Banks can issue short-term negotiable certificates of deposit (CDs) to institutional investors so the
banks can manage their liabilities and liquidity. As part of their liability management banks issue CDs
to raise extra funds to meet loan and funding commitments, for example when they expect customers
to spend more money, say, in the holiday season.

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 ch9 Summary
Category # of Questions
Difficulty: Easy 31
Difficulty: Hard 5
Difficulty: Medium 44
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