The Interest Rate Charged on Secured Short-Term Loans to a Corporation

question 85

Multiple Choice

The interest rate charged on secured short-term loans to a corporation is generally higher than that charged on unsecured short-term loans because

• A) secured loans are less risky than unsecured loans.
• B) the risk of default is lower on secured loans.
• C) it is costly to negotiate and administer secured loans.
• D) lenders of secured loans must pay more for their funds.

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Definitions:

Hurdle Rate

The minimum rate of return required by management for an investment to be acceptable, used in budgeting and capital allocation decisions.

Internal Rate

This term is too broad without specific context, such as “Internal Rate of Return (IRR).” Assuming IRR, it is a financial metric used to estimate the profitability of potential investments.

Present Value

The today's value of a forthcoming sum of money or cash flow sequence, determined by a specific rate of return.

Net Present Value Method

A method used in capital budgeting to evaluate the profitability of an investment, calculating the difference between the present value of cash inflows and outflows over a period.