What is a bank overdraft?

• A. A type of long-term investment
• B. A short-term loan from a bank
• C. A cash reserve held by a business
• D. A method for distributing dividends

Answer: (B)

A bank overdraft is essentially a short-term loan provided by a bank that allows an individual or a business to withdraw more money than they have in their account, up to a certain limit. This facility gives the account holder immediate access to additional funds when they need to cover expenses, which can be particularly beneficial for managing cash flow.

This form of borrowing is typically repayable on demand or within a short period and can help prevent bounced checks and other penalties due to insufficient funds. It is important to note that overdrafts often incur interest and fees, making it vital for users to understand the terms of the arrangement.

The other options refer to different financial concepts that do not align with the definition of a bank overdraft. Long-term investments typically involve acquiring assets that are expected to appreciate over time, while cash reserves are funds set aside for emergencies or operations, and methods for distributing dividends relate to how profits are shared with shareholders. These distinctions clarify the unique function of an overdraft in financial management.