UNIT III: LENDERS’ AND BORROWERS’ TRANSACTION COSTS Flashcards
measured in terms of the interest rate charged by producers and paid by the consumers.
PRICE (in credit market)
categorization of the supply of credit
- simple
- effective
SUPPLY OF CREDIT
determined by the cost of funds that a financial institution must pay to acquire its loanable fund
SIMPLE SUPPLY
SUPPLY CREDIT
cost of loanable funds are the interest rates by which financial institutions must pay to their depositors or lenders
simple supply
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.
EFFECTIVE SUPPLY
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
EFFECTIVE SUPPLY
what comprises interest rate?
- cost of loanable funds
- transaction costs
a. operational costs
b. inflation costs
c. incidental costs - profit margin
COMPONENT OF INTEREST RATE
represent the financial institution’s pure costs of funds or interest costs, paid to receive adequate lending capital
COST OF LOANABLE FUNDS
notes:
-indicate where the funding for the product is coming from
-pag multiple resources, sources must be weighted and averaged
COMPONENT OF INTEREST RATE
also called as administrative costs
OPERATIONAL COSTS (under transacation costs)
COMPONENT OF INTEREST RATE
cover both variable and fixed expenses incurred by the institution by performing the funds mobilization and lending operations
OPERATIONAL COSTS (under transaction costs)
COMPONENT OF INTEREST RATE
as with the cost of loanable funds, operational costs must also be computed in an ___________________________ basis.
annual percentage
COMPONENT OF INTEREST RATE
annual percentage in the the weighted average prices of goods and services
INFLATION COSTS
COMPONENT OF INTEREST RATE
affects value of money over time
INFLATION COSTS
COMPONENT OF INTEREST RATE
includes risk-related costs incurred by financial institutions from loan delivery and recovery
INCIDENTAL COSTS
COMPONENT OF INTEREST RATE
risks can be in the form of _______ (default) and/or _____________ (arrears) of the borrowers
NON-REPAYMENT; LATE REPAYMENT
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
INCIDENTAL COSTS
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.
PROFIT
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
FALSE
PROFIT MARGIN gets the biggest component of interest rate followed by OPERATIONAL EXPENSES
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
TRUE
OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS
which only lender charge a risk premium?
FORMAL LENDERS
OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS
coverage for risk premium?
unexpected death of borrower, followed by the default payment
OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS
which lender incurs high transaction costs
FORMAL LENDERS
OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS
which lender requires a more rigorous application process for loans
FORMAL LENDERS
OPERATIONS AND COSTS OF FORMAL AND INFORMAL LENDING INSTITUTIONS
which lender has lower loan exposure
INFORMAL LENDERS
to have a competitive edge in the credit market, lenders must offer credit at a _________ and __________ price
REASONABLE; AFFORDABLE
BORROWERS consider both the _______ and ________ incurred in selecting their credit sources
- interest rate
- transaction costs
TRUE OR FALSE
borrower transaction costs are made up of the _________________ and the __________________________ spent in applying for a loan.
actual cash outlay
opportunity cost of time
effective cost of lending is equal to
= COST OF LOANABLE FUNDS + TRANSACTION COSTS + PROFIT MARGIN
note:
-expressed in annual percentage
effective cost of borrowing is equal to
= TRANSACTION COSTS + INTEREST PAYMENT
note:
-transaction costs consist of different fees
-expressed in annual percentage
