Some Bank Loans Require the Firm to Maintain Some Amount

question 55

Multiple Choice

Some bank loans require the firm to maintain some amount of money on a balance at the bank which is known as:

• A)compensating balance
• B)transactions motive
• C)precautionary motive
• D)simple interest balance

Examine the implications of sale and leaseback transactions on immediate gain recognition.

Understand the concept of incremental and differential costs.

Know that sunk costs are irrelevant to future decision-making.

Recognize the relevance of out-of-pocket costs for current and future decisions.

---

Definitions:

Bond Indenture

A legal document specifying the terms and conditions under which a bond is issued, including the interest rate, maturity date, and other covenants.

Stated Interest Rate

The annual interest rate declared on a financial instrument, such as a loan or bond, not taking into account compounding or fees.

Market Interest Rate

The prevailing rate of interest available in the market, influencing the rates charged on loans and paid on deposits.

Face Value

The face value or monetary amount displayed on a bond, note, or any financial document, indicating the total due upon its maturity.