CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A firm has a committed bank line of credit and also holds a portfolio of short-term marketable securities. Compared with relying on an uncommitted line, the committed line is most likely to:
A committed line of credit most likely gives the firm a contractual guarantee that funds will be available, usually in return for a commitment fee on the unused amount. An uncommitted line lets the bank refuse to lend, so it is a less reliable source of liquidity.
- AProvide a contractual guarantee that funds are available, usually for a feeCorrect
- BCarry no cost until the first draw is made
- CHave a lower priority than trade credit in funding needs
Explanation
A committed line obliges the bank to lend up to the limit, typically in exchange for a commitment fee, so funds are more certain. Option B is wrong because fees are normally charged on the unused portion. Option C is not a feature of committed lines.
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