Final answer:
A line of credit is a flexible loan from a bank or financial institution, which allows a company like the Cornett Company to borrow up to a certain limit as needed, paying interest only on the sum borrowed.
Step-by-step explanation:
When Cornett Company signs an agreement with Gladys that allows the company to borrow up to $100,000 at a 6% annual interest rate as needed, this type of agreement is commonly referred to as a line of credit. A line of credit is a flexible loan from a bank or financial institution.
Similar to a credit card, it lets a company borrow up to a certain amount of money when needed, repaying the money with interest only on the amount borrowed. This is different from a term loan, where a business borrows a lump sum of money and repays it over a set term with set payments, and commercial paper, which is a short-term unsecured promissory note issued by large corporations to finance short-term cash flow needs.
Like a bank loan for an individual, a firm can borrow a sum of money and promise to repay it, with interest, over a set period. Should the firm fail to make payments, the lender can require the firm to sell assets to cover the debt. In contrast, with bonds, a firm promises to pay bondholders interest and return the principal on a predetermined schedule; however, if the firm defaults, bondholders may only recover a fraction of their investment.