Q&A Hero

Q: What is the difference between forward rates and spot rates? What is the purpose of forward contracts?

Q: A dealer in London posts an ask rate of .6238 and a bid rate of .6237. How much, in U.K. pounds, would it cost to purchase $100,000. For how much in pounds could you sell $100,000?

Q: What is the role of arbitrage in the foreign exchange markets?

Q: Forward contracts benefit only the customer due to a reduction in uncertainty.

Q: Forward rates, like spot rates, are quoted in both direct and indirect form.

Q: Forward contracts are usually quoted for periods greater than one year.

Q: A narrow spread indicates efficiency in the spot exchange market.

Q: The difference between the asked price and the bid price is known as the spread.

Q: Spot exchange markets have the potential for arbitrage opportunities for a long period of time.

Q: The major advantage of the forward market is risk reduction.

Q: The forward rate is the same as the spot rate that will prevail in the future.

Q: When banks transact in foreign currencies, the direct bid quote is greater than the direct asked quote.

Q: Spot exchange markets are efficient due to arbitrage forces.

Q: Spot transactions are made immediately in the market place at the market price.

Q: Transactions carried out in the foreign exchange markets can include direct or indirect exchange rate quotes.

Q: Foreign exchange transactions carried out in the spot market entails an agreement today to deliver a specific number of units of currency on a future date in return for a specified number of units of another currency.

Q: The foreign exchange market provides a physical entity that transfers the purchasing power from one currency to another.

Q: The bid rate (also called the offer rate) is the number of units of home currency paid to a customer in exchange for their foreign currency.

Q: A direct quote in Bombay tells one how many British pounds can buy one Indian rupee.

Q: The efficiency of foreign currency markets is ensured, in large measure, by the process of arbitrageurs.

Q: Arbitrage is the process of buying and selling in one market in order to make a riskless profit.

Q: Arbitrage eliminates forward discounts and premiums across the markets of a single currency.

Q: The foreign exchange market is similar in form to the New York Stock Exchange.

Q: The asked rate is the price a customer will receive from a foreign currency trader when selling a foreign currency.

Q: A cross rate is the computation of an exchange rate for a currency from the exchange rates of two other countries.

Q: The international currency system that presently exists is best described as a ________ rate currency system. A) parity B) fixed C) multinational D) floating

Q: A foreign exchange dealer in New York posts an ask price of .02201 for Indian rupees and a bid price of .02197. What is the dealer's profit on the simultaneous purchase and sale of 1 million rupees? A) $40 profit B) ($40 )loss C) $400 profit D) ($4) loss

Q: The exchange rate that represents the number of units of a foreign currency that can be purchased with one unit of a home currency is referred to as a(n) ________ quote. A) forward B) direct C) market D) indirect

Q: The exchange rate that represents the number of units of a home currency that is required to purchase one unit of a foreign currency is referred to as a(n) ________ quote. A) forward B) direct C) market D) indirect E) arbitrage

Q: A dealer in New York offers to buy U.K. pounds for $1.60 and sell them for $1.605. The different prices are due to: A) arbitrage. B) a tax on currency transactions. C) the bid-ask spread. D) supply and demand.

Q: A trader who simultaneously bought Swiss francs in New York for .9772 and sold them in Zurich for .9774 would be practicing: A) simple arbitrage. B) inside trading. C) compound arbitrage. D) parity exploitation.

Q: Forward exchange rates: A) reduce uncertainty about future value of currencies. B) are always slightly lower than the spot rate. C) reflect expectations about the future value of currencies. D) both A and C.

Q: Assume that a firm purchases foreign currency in order to complete the purchase of raw material from an overseas supplier. The currency is purchased today at an exchange rate that is good only for today. This transaction is referred to as a(n) ________ transaction. A) forward B) arbitrage C) spot D) hedge

Q: The following are the prices in the foreign exchange market between the U.S. dollar and a foreign currency (fc). Spot 0.6335US$/fc; three-month forward 0.6375US$/fc. What was the discount or premium on three-month forward for the foreign currency? A) 0.63% premium B) 0.40% premium C) 0.63% discount D) 0.40% discount

Q: Based on the forward rates in table 19.1, the British pound is expected to: A) stay the same against the dollar. B) weaken against the dollar. C) fluctuate randomly against the dollar. D) strengthen against the dollar.

Q: Briefly describe at least three useful tools for maintaining control over accounts receivable.

Q: The minimum level of inventory the firm plans to hold for the foreseeable future is a temporary asset investment.

Q: Investing in additional marketable securities and inventories creates higher profitability and lower liquidity.

Q: Marketable securities are near-cash assets because they can be converted into cash quickly.

Q: One of the attractive features of commercial paper is an active secondary market.

Q: Commercial paper is a short-term, unsecured promissory note.

Q: Electronic funds transfer (EFT) could eventually eliminate the use of most checks and minimize float.

Q: If revenues can be forecast to fall within a tight range of outcomes, then the ratio of cash and near-cash to total assets will be greater for the firm than if the prospective cash inflows might be expected to vary over a wide range.

Q: Although CDs are slightly more risky than Treasury bills, the yield is usually slightly less.

Q: A negotiable certificate of deposit (CD) is a marketable receipt for funds deposited in a bank.

Q: A banker's acceptance is a draft drawn on a specific bank by an exporter in order to obtain payment for goods that he has shipped to a customer who maintains an account with that specific bank.

Q: T-bills and Treasury bonds are guaranteed by the full faith and credit of the United States and are therefore default-free.

Q: When faced with a surplus of cash, most firms should stretch their trade accounts.

Q: Management of a firm's liquidity involves management of the firm's investment in current assets.

Q: Which of the following terms would tend to minimize a firm's investment in accounts receivable? A) net 15 B) net 30 C) 1/15 net 45 D) 2/10 net 30

Q: Accounts receivable typically comprise ________ of a firm's assets. A) 25% B) 50% C) less than 1% D) 10%

Q: Which of the following would NOT typically be used for assessing customer quality for purposes of granting trade credit? A) Ratio analysis B) Aging of accounts receivable C) Credit scoring D) Credit rating services

Q: Typical securities in which firms invest their temporary cash surpluses include all of the following EXCEPT: A) U. S. Treasury Bills. B) commercial paper. C) high quality corporate bonds. D) Money Market Mutual Funds.

Q: "Float" is the term given to: A) differences between the cash balance and the balance of cash plus marketable securities. B) differences between the cash balance in the ledger and the funds available in the firm's checking account. C) the period between the date an invoice is received and the date on which it must be paid. D) the practice of deliberately delaying payments beyond the due date.

Q: A disadvantage involved in investing in marketable securities is that: A) this reduces the risk of illiquidity. B) this investment increases net working capital. C) this investment offers a flexible means of financing. D) these assets offer low rates of return, commensurate with their risk.

Q: Which of the following is NOT a typical characteristic of money-market securities? A) Little or no default risk B) Liquid, easily bought and sold C) Interest is not taxable at state or federal level D) Maturities less than 1 year

Q: The annual percentage rate (APR) on short-term loans from Bank A is 5.75% per year. Bank B claims that their interest rate is only 5.44% per year. However, Bank B charges interest on a discount basis. Which bank is charging the lowest APR on a one-year loan?

Q: Lightbulbs.com sells industrial and institutional lighting supplies through its website. It sells directly to businesses and organizations such as universities and hospitals on terms of net 90. To finance its rather large investments in receivables and inventory, the firm has an average need for $2,000,000 in short-term loans. It is choosing between 3 alternative arrangements: Converse Bank offers a 4.75% APR with interest and principal paid at the end of the year. Guaranty Bank offers a rate of 4.5% with interest discounted at the time of the loan. County Bank offers 4.25% with a 10% compensating balance. Which bank offers the APR when all terms of the loan are considered? You may assume that required amounts are borrowed for the full year.

Q: The Smith Corporation has purchased $500,000 worth of inventory. The vendor offers terms of 1/15 net 45. Unfortunately, Smith does not have enough cash available to take advantage of the discount. It can borrow $500,000 from Wesson National Bank for 30 days at an annual percentage rate of 6%. Should Smith forego the discount or pay within the discount period with money borrowed from the bank?

Q: Maximus, Inc. is planning to borrow $2 million for 9 months at a discounted interest rate of 4.5%. What is the annual percentage rate on the loan?

Q: The U.R. Bloom Corporation established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $125,000 at a rate of 5%. A compensating balance averaging 10% of the loan is required. If the firm needs $100,000 for six months, what is the dollar cost of the loan and the annual percentage rate (APR)?

Q: Calculate the effective cost of the following trade credit terms if the discount is foregone and payment is made on the net due date.a. 2/15 net 30b. 2/15 net 45c. 2/15 net 60

Q: Discuss the advantages of using commercial paper.

Q: Describe the differences between secured and unsecured short-term credit.

Q: Commercial paper offers the borrower the same flexibility that exists when bank credit is used to meet financing needs.

Q: Accrued wages and taxes provide sources of financing that rise and fall spontaneously with the level of the firm's sales.

Q: Secured loans are those that are secured by the lender's faith in the ability of the borrower to repay the funds when due.

Q: Lines of credit involve fixed rates of interest.

Q: Commercial paper is an unsecured form of credit.

Q: Trade credit provides one of the most flexible sources of short-term financing available to the firm.

Q: Lines of credit often require that the borrower maintain a minimum balance in the bank throughout the loan period.

Q: Prior to establishing trade credit, the firm is required to make extended formal agreements with the company.

Q: A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.

Q: Commercial paper is a source of credit available to large firms with healthy balance sheets.

Q: The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.

Q: Pledging accounts receivable as a source of short-term credit: A) is a type of loan secured by accounts receivable. B) is a form of spontaneous credit. C) involves the outright sale of accounts receivable to a financial institution. D) is an inexpensive but risky source of short-term financing.

Q: Use the following information to answer the following question(s). ABC, Inc. requires $270,000 in short-term credit and is currently arranging a loan with its bank. ABC plans to use the funds for six months, the annual rate on the loan is 12%, and the bank will require a 10% compensating balance. A firm will borrow $1 million for six months on a discount basis. The annual interest rate on the loan is 12%. What is the annual percentage cost of the loan? A) 11.00% B) 12.77% C) 13.00% D) 14.23%

Q: Use the following information to answer the following question(s). ABC, Inc. requires $270,000 in short-term credit and is currently arranging a loan with its bank. ABC plans to use the funds for six months, the annual rate on the loan is 12%, and the bank will require a 10% compensating balance. What is the annual percentage cost of the loan? A) 15.67% B) 14.00% C) 13.33% D) .83%

Q: Use the following information to answer the following question(s). ABC, Inc. requires $270,000 in short-term credit and is currently arranging a loan with its bank. ABC plans to use the funds for six months, the annual rate on the loan is 12%, and the bank will require a 10% compensating balance. If ABC must have loan proceeds of $270,000, then it must borrow: A) $270,000. B) $300,000. C) $410,000. D) $500,000.

Q: When a commercial bank extends short-term credit to a firm, it can provide a line of credit that involves: A) a legal obligation on the part of the bank to provide the stated credit. B) no legal obligation on the part of the bank to provide the stated credit. C) the requirement that the borrower maintain a compensating balance with the bank throughout the loan period. D) a fixed rate of interest.