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Chapter 3: 4DQ (page 247)

What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?

Short Answer

Expert verified

The prime interest rate is offered by the bank to the customers having the highest credit rating. The interest rate offered to the average customers is 1-2% higher than the prime interest rate.

Step by step solution

01

Meaning of prime interest rate

The prime interest rate is the interest rate offered by the bank to its customer that has the highest credit rating. These rates are lower than the bank’s average interest rate as the chances of default are low in this case.

02

The interest rate of an average customer in regard to the prime rate

The interest rate charged by the bank of an average customer is 1-2% higher than the prime interest rate offered by the bank. The prime rate is usually offered to large corporations.

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Most popular questions from this chapter

What is the difference between pledging accounts receivable and factoring accounts receivable?

Antonio Banderos & Scarves make headwear that is very popular in the fall-winter season. Units sold are anticipated as follows:

October

1,250

November

2,250

December

4,500

January

3,500

Total units

11,500

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory build-up.

However, Antonio decides to go with level production to avoid being out of merchandise. He will produce the 11,500 items over four months at a level of 2,875 per month.

a. What is the ending inventory at the end of each month? Compare the units sales to the units produced and keep a running total.

b. If the inventory costs $8 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 1 percent or the monthly rate.)

Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset build-up will be required to service the new accounts.

e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms?

Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?

Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement.
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