UNIT III: LENDERS’ AND BORROWERS’ TRANSACTION COSTS

Question 1

measured in terms of the interest rate charged by producers and paid by the consumers.

Answer 1

PRICE (in credit market)

Question 2

categorization of the supply of credit

Answer 2

1. simple
2. effective

Question 3

SUPPLY OF CREDIT

determined by the cost of funds that a financial institution must pay to acquire its loanable fund

Answer 3

SIMPLE SUPPLY

Question 4

SUPPLY CREDIT

cost of loanable funds are the interest rates by which financial institutions must pay to their depositors or lenders

Answer 4

simple supply

Question 5

SUPPLY OF CREDIT

does not only consider the cost of loanable funds but also other costs the lender must incur to design, extend, and recover the loan.

Answer 5

EFFECTIVE SUPPLY

Question 6

SUPPLY OF CREDIT

transaction costs which include the “operational costs (staff costs, building costs, computer costs, vehicle costs, utilities, etc.), inflation costs (the fact that money loaned is losing purchasing power), the costs of expected losses from default, and a profit margin

Answer 6

EFFECTIVE SUPPLY

Question 7

what comprises interest rate?

Answer 7

1. cost of loanable funds
2. transaction costs
   a. operational costs
   b. inflation costs
   c. incidental costs
3. profit margin

Question 8

COMPONENT OF INTEREST RATE

represent the financial institution’s pure costs of funds or interest costs, paid to receive adequate lending capital

Answer 8

COST OF LOANABLE FUNDS

notes:
-indicate where the funding for the product is coming from
-pag multiple resources, sources must be weighted and averaged

Question 9

COMPONENT OF INTEREST RATE

also called as administrative costs

Answer 9

OPERATIONAL COSTS (under transacation costs)

Question 10

COMPONENT OF INTEREST RATE

cover both variable and fixed expenses incurred by the institution by performing the funds mobilization and lending operations

Answer 10

OPERATIONAL COSTS (under transaction costs)

Question 11

COMPONENT OF INTEREST RATE

as with the cost of loanable funds, operational costs must also be computed in an ___________________________ basis.

Answer 11

annual percentage

Question 12

COMPONENT OF INTEREST RATE

annual percentage in the the weighted average prices of goods and services

Answer 12

INFLATION COSTS

Question 13

COMPONENT OF INTEREST RATE

affects value of money over time

Answer 13

INFLATION COSTS

Question 14

COMPONENT OF INTEREST RATE

includes risk-related costs incurred by financial institutions from loan delivery and recovery

Answer 14

INCIDENTAL COSTS

Question 15

COMPONENT OF INTEREST RATE

risks can be in the form of _______ (default) and/or _____________ (arrears) of the borrowers

Answer 15

NON-REPAYMENT; LATE REPAYMENT

Question 16

COMPONENT OF INTEREST RATE

consists of guarantee fees or insurance premia applicable to particular loans in the bank’s portfolio when it participates with the special lending programs

Answer 16

INCIDENTAL COSTS

Question 17

COMPONENT OF INTEREST RATE

necessary for the financial institutions’ own growth and sustainability, and for the benefit of its owners (i.e., shareholders) through the distribution of dividends.

Answer 17

PROFIT

Question 18

OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS

TRUE OR FALSE

in the formal sector, operational expenses gets the biggest component of interest rate followed by profit margin then cost of funds

Answer 18

FALSE

PROFIT MARGIN gets the biggest component of interest rate followed by OPERATIONAL EXPENSES

Question 19

OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS

TRUE OR FALSE

majority of the informal sector incur minimal expenses for the cost of funds and operational expenses, so profit margin gets the greatest allocation of interest

Answer 19

TRUE

Question 20

OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS

which only lender charge a risk premium?

Answer 20

FORMAL LENDERS

Question 21

OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS

coverage for risk premium?

Answer 21

unexpected death of borrower, followed by the default payment

Question 22

OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS

which lender incurs high transaction costs

Answer 22

FORMAL LENDERS

Question 23

OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS

which lender requires a more rigorous application process for loans

Answer 23

FORMAL LENDERS

Question 24

OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS

which lender has lower loan exposure

Answer 24

INFORMAL LENDERS

Question 25

to have a competitive edge in the credit market, lenders must offer credit at a _________ and __________ price

Answer 25

REASONABLE; AFFORDABLE

Question 26

BORROWERS consider both the _______ and ________ incurred in selecting their credit sources

Answer 26

1. interest rate
2. transaction costs

Question 27

TRUE OR FALSE

borrower transaction costs are made up of the _________________ and the __________________________ spent in applying for a loan.

Answer 27

actual cash outlay

opportunity cost of time

Question 28

effective cost of lending is equal to

Answer 28

= COST OF LOANABLE FUNDS + TRANSACTION COSTS + PROFIT MARGIN

note:
-expressed in annual percentage

Question 29

effective cost of borrowing is equal to

Answer 29

= TRANSACTION COSTS + INTEREST PAYMENT

note:
-transaction costs consist of different fees
-expressed in annual percentage