Short-term securities issued by the Federal Housing Administration are known as
Answer(s): A
A short-term secunt1t issued by a corporation or agency created by the U.S. government, such as the Federal Housing Administration, is an agency security (agency issue). Among the largest issuers of agency securities (excluding the Treasury) are the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the other entities that provide credit to farmers and home buyers. Other issuers of home mortgage- backed securities include the Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Which one of the following is a spontaneous source of financing?
Answer(s): D
Trade credit is a spontaneous source of financing because it arises automatically as part ofi1 purchase transaction
Price Publishing is considering a change in its credit terms from n/30 to 2/10, n/30. The company's budgeted sales for the coming year are $24,000,000, of which 90% are expected to be made on credit. If the new credit terms are adopted. Price estimates that discounts will be taken on 50% of the credit sales; however, uncollectible accounts will be unchanged. The new credit terms will result in expected discounts taken in the coming year of
If 90% of the $24,000,000 of sales are on credit, $21,600,000 of sales will be subject to the discount. If 50% of the credit customers take the discount, discounts will be taken on sales of $10,800,000. The expected discount will be $216,000 ($10,800,000 x 2%).
A corporation is currently experiencing cash-flow problems and has determined that it is in need of short-term credit. It can either use its trade credit on $100,000 of accounts payable with terms of 1/10, net 30 or a 30-day note with a 20% annual simple interest rate. Which is the best alternative, and what is its effective rate of interest (rounded to a whole percentage and using a 360-day year)?
Answer(s): B
The corporation can obtain trade credit for 20 additional days by not paying within the discount period. Instead of paying $99,000 to satisfy its obligation within 10 days, it can pay $100,000 at the end of 30 days. The corporation will thus incur $1,000 in interest to hold the $99,000 for the 20 days. Because a 360-day year has 18 such periods, the interest rate is approximately 18.18% [($1,000 ÷ $99,000) x 18]. However, if compounding effects are considered, the rate is higher. The effective rate, taking compounding into consideration, is found using the following formula:Effective rate = [1 + (1,000 - 99,000)]18 - 1.0 = 19.83% In comparison, the 30-day note has an effective annual rate of 21 94%, calculated as follows:Effective rate = [1 + (.20 ÷ 12)]12 - 1.0 = 21.94% Therefore, the corporation should use trade credit to obtain the short-term credit.
An example of secured short-term financing is
A document of title is usually issued by a bailee covering goods in the bailee's possession or care (UCC 1-201). It represents ownership of the goods and is ordinarily needed to obtain the goods from the baillee. The two major types of documents of title are bills of lading (issued by carriers) and warehouse receipts. A warehouse receipt is issued by a person engaged in the business of storing goods for hire. Security for short-term inventory financing can be arranged if the debtor places its inventory under the control of the lender or its agent (e g , a public warehouse), and the lender holds the warehouse receipts.
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