When a Firm Factors Its Accounts Receivable as Opposed to Pledging

question 3

Multiple Choice

When a firm factors its accounts receivable as opposed to pledging them, the firm will:

• A)offer the lender the accounts receivable as collateral to the loan.
• B)sell the accounts receivable at a discount to the lender.
• C)in all cases, remain liable for any uncollected accounts sold to the lender.
• D)None of the above

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Definitions:

Forward Contract

A tailor-made agreement between two entities to purchase or sell a valuable at an agreed price on a predetermined date in the future.

July Futures Contract

A standardized, legal agreement to buy or sell a commodity or financial asset at a predetermined price at a specified time in July.

Settle Price

The official price at the end of a trading session on a futures exchange, used for calculations of margin and account balances.

Option Premium

The price paid for the rights granted by an options contract, not considering the actual trading of the underlying asset.