Question

The following questions are true or false

1. Since commercial bank loans are cheaper than trade credit, few firms use trade credit.

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2. The smaller the trade discount, the more expensive is the trade credit.

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3. A change in the trade discount from 2% to 3% encourages the use of trade credit.

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4. Trade credit is primarily used by retailers to finance inventory.

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5. If goods cost $1,000 and the terms of credit are 2/15, n45, the firm does not have to pay until the 45^th day.

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6. One reason why firms use trade credit is that it is a spontaneous source of finance.

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7. When a commercial bank grants a loan, it may decrease the cost of the loan by requiring an origination fee.

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8. Commercial paper is usually secured by inventory.

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9. Only firms with good credit ratings are able to sell commercial paper.

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10. If a firm has an excellent credit rating, it may use commercial paper as a source of long-term finance.

Answer 1

Answer 1:

False

Explanation:

Although commercial bank loans are cheaper than trade credit, most firms use trade credit.

Answer 2:

False

Explanation:

Cost of trade credit = Discount % / (1 - Discount %) * 365 / (Payment Date-Discount Period)

As such higher the trade discount, the more expensive is the trade credit

Answer 3:

False

Explanation:

Increase in trade discount from 2% to 3% encourages early payment to avail discount and discourages the use of trade credit.

Answer 4:

True

Explanation:

Trade credit is primarily used by retailers to finance inventory.

Answer 5:

True

Explanation:

If goods cost $1,000 and the terms of credit are 2/15, n 45, the firm does not have to pay until the 45^th day.

As per these credit terms, the buyer is allowed credit for 45 days

Answer 6:

True

Explanation:

Trade credit is that it is a spontaneous source of finance and hence is used by a majority of business to business (B2B) trades.

Answer 7:

False

Explanation:

Requirement of origination fees increases the cost of the loan.

Answer 8:

False

Explanation:

Commercial paper is usually without collateral.

Answer 9:

True

Explanation:

Commercial papers are unsecured source of finance and only firms with good credit ratings are able to sell commercial paper

Answer 10:

False

Explanation:

Commercial paper is a source of short-term finance only.