Question

ASAP please

4. Suppose that a firm elected to tighten its trade credit policy from “2/10, net 90” to “2/10, net 30.” What effect could the firm expect this change to have on its liquidity?

6. Why is the rate on commercial paper usually less than the prime rate charged by bankers and more than the Treasury bill rate?

8. Who is able to issue commercial paper and for what purpose?

Answer 1

4)	As the discount rate of 2% for payment within 10 days
	remains the same, the number of customers taking
	the discount would depend on how successful the
	firm is, in enforcing the 30 days limit for non discount
	customers.
	If the firm is able to enforce the 30 day limit for non-
	discount customers, then the number of customers
	taking discount may increase as the cost of not taking
	discount increases for the customers. Besides, in such
	a situation the non-discount customers would also be
	paying early. All these effects would increase the
	liquidity of the firm.
	On the other hand, if the firm is not able to enforce
	the 30 day limit for non discount customers. The effect
	on liquidity would be marginal only as, the cost of
	not taking discount would remain the same. But, there
	could be some improvement in liquidty when some
	non discount customers, who generally stick to
	contractual terms, pay within 30 days.
6)	Commercial paper is issued by credit worthy firms for
	their short term needs and there is justification to
	issue it only if the interest rate is less than the rate
	offered by the bankers. Or else they can source from
	the banks. Further, their credit worthiness allows them
	to quote lower interest rates.
	But, when compared to the treasury bill rate the rate
	would be higher as the risk is more. Treasury bills
	being issued by the Government are riskless. Hence,
	they can be issued at lower interest rates. Commercial
	paper, on the other hand, have the risk attached to the
	firm issuing it, which in any case, is more than the
	Treasury bill.
8)	Creditworthy firms are able to issue commercial paper
	for their short term needs like financing inventories
	and receivables.
	The maturities tend to be 270 days or less and are
	usually of denominations of $100000 or more.