alleryStart learning →How does a revolving credit agreement differ from an ordinary line of credit?
AIt is guaranteed and carries an extra fee
BIt is unsecured and carries no interest cost
CIt is secured by the firm's fixed assets only
DIt is arranged for a period of three months
Answer & Solution
Correct answer: A. It is guaranteed and carries an extra fee
1. A revolving credit agreement is basically a guaranteed line of credit.
2. Because the funds are guaranteed to be available, it carries an extra fee in addition to interest.
3. These agreements are often arranged for a period of two to five years, well beyond the one-year horizon of an ordinary line of credit.
4. Interest still applies, so the option claiming no interest cost misreads what the extra fee buys.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.3 Obtaining Short-Term Financing_
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