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11 Cards in this Set
- Front
- Back
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Line of Credit (defined) |
informal agreement between a borrow and a financial institution whereby the financial institution agrees to a maximum amount of credit that it will extend them at any one time
*not legally binding |
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How is a Line of Credit like a Short-Term note? |
-unsecured
-interest rate is indexed to the prime rate
-may require a compensating balance |
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How is a Line of Credit unlike a Short-Term note? |
not arranged for a specific purpose
-i.e. used to meet working capital requirements rather than purchasing supplies for a specific project |
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Revolving Credit Agreement (defined) |
like a line of credit but with an actual legal arrangement |
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Letter of Credit as a short-term borrowing option (defined) |
conditional commitment by a bank to pay a third party in accordance with specified terms and commitments
i.e. only pay after they receive proof that the goods have shipped |
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Advantages of using a Letter of Credit |
-commonly available for creditworthy firms
-highly flexible
-unsecured |
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Disadvantages of using a Letter of Credit |
-poor credit rating results in higher interest rates
-typically involves a fee
-requires satisfaction in the short term
-required compensating balance increases cost and reduces effective funds available
-is not legally binding for financial institution |
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Commercial Paper for short-term borrowing (defined) |
short-term unsecured promissory notes sold by large, highly creditworthy firms as a form of short-term financing |
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What is the typical amount of time for a Commercial Paper note? |
typically 270 days or less (or would require SEC registration)
6 months at the longest
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Advantages of using Commercial Paper for short-term borrowing: |
-may be sold with interest discounted
-may be sold directly to investors or through a dealer
-effective interest rate is lower than borrowing through a commercial bank
-large amounts of funds can be secured through multiple commercial papers
-compensating balances not required
-unsecured
-for general use
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Disadvantages of using Commercial Paper for short-term borrowing: |
-only available to credit-worthy firms
-requires satisfaction in the short term (usually a large amount)
-lacks flexibility of extension |
