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AAE 130 > UNIT V: Analyzing the Lending Operations of Selected Financial Institutions > Flashcards

UNIT V: Analyzing the Lending Operations of Selected Financial Institutions Flashcards

1
Q

TYPES OF FINANCIAL INTERMEDIARIES

A
  1. depository
  2. contractual savings
  3. investment
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2
Q

TYPES OF FINANCIAL INTERMEDIARIES

loan associations, mutual savings bank, credit unions

A

depository institutions

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3
Q

TYPES OF FINANCIAL INTERMEDIARIES

insurance companies and pension funds

A

contractual savings institutions

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4
Q

TYPES OF FINANCIAL INTERMEDIARIES

finance companies, mutual funds, money market mutual funds, and investment banks

A

investment intermediaries

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5
Q

FUNCTIONS OF FINANCIAL INTERMEDIARIES

A
  1. reduce transaction costs
  2. allow risk sharing
  3. solve problems created by asymmetric information
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6
Q

PROBLEMS CREATED BY ASYMMETRIC INFORMATION

A

-adverse selection
-moral hazard

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7
Q

PROBLEMS CREATED BY ASYMMETRIC INFORMATION

occurs before a transaction takes placce

A

adverse selection

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8
Q

PROBLEMS CREATED BY ASYMMETRIC INFORMATION

occurs after a transaction takes place

A

moral hazard

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9
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTs

A
  1. credit investigation and approval
    a. five C’s
    b. credit scoring
  2. monitoring and enforcement of restrictive covenants
  3. credit rationing
    a. first type
    b, second type
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10
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

provisions into loan contracts that prohibit the borrowers from engaging in risky activities

A

monitoring and enforcement of restrictive covenants

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11
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTs

a lender refuses to make a loan of any amount to a borrower, even if the borrower is willing to pay a higher interest rate

A

first type credit rationing

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12
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTs

a lender is willing to make a loan but restricts the size of the loan to less than the borrower would like

A

second type credit rationing

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13
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

computed using a quanti model with explanatory variables based on credit risk of borrower

A

credit scoring

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14
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

normally used for smaller accounts such as those granted to indiv clients

A

credit scoring

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15
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

involves five C’s and credit scoring

A

credit investigation and approval

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16
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

normally used for large-value transactions

A

five C’s

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17
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

FIVE C’s

ability of the credit applicant to repay loan when it comes due

A

capacity

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18
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

FIVE C’s

overall impression from applicant’s credit history, business track record

A

character

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19
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

FIVE C’s

the applicant must not be highly-leveraged (madaming utang)

A

capital

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20
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

FIVE C’s

properties pledged to the lending institution to serve as additional protection

A

collateral

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21
Q

PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS

FIVE C’s

lending institutions must also consider the different external factors which may have significant impacts on its operations

A

conditions

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22
Q

CREDIT INVESTIGATION AND APPROVAL

what are the Five C’s?

A
  1. capacity
  2. character
  3. capital
  4. collateral
  5. conditions
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23
Q

OTHER PRACTICES OF CREDIT RISK MANAGEMENT

A

-specialization in lending
-long-term customer relationships
-loan commitments
-compensating balances/Linkage of savings to credit approval
-reliance on guarantee funds
-reliance on donor trust funds
-credit insurance

24
Q

THREE MAIN TYPES OF INTEREST RATES

A
  1. nominal interest rates
  2. real interest rates
  3. effective interest rates
25
THREE MAIN TYPES OF INTEREST RATES quoted or stated rates by which the compounding process and inflation are not taken into consideration
nominal interest rates
26
THREE MAIN TYPES OF INTEREST RATES interest rates adjusted for the expected erosion of purchasing power resulting from inflation, reflecting the true cost of borrowing
real interest rates
27
THREE MAIN TYPES OF INTEREST RATES rates by which the effects of compounding over time are taken into account
effective interest rates
28
SOURCES OF CAPITAL
-personal savings -windfall income -sale of fixed assets -credit
29
ability of an individual to obtain goods, services, or money at the present time in exchange of a promise to pay at a definite future time
CREDIT
30
refers to loans granted by financial institutions to borrowers who pay credit in the form of goods, services, or money.
CREDIT
31
SOURCES OF CREDIT
-private individuals -institutional lenders
32
TYPES/CLASSIFICATION OF LOANS
A. based on repayment method -short-term <1 year -medium-term or intermediate-term loans (1 year 10 years B. based on use -commodity loans -activity loans C. based on security requirement -secured loans -unsecured loans D. based on repayment plan -single payment -amortized loan
33
TIME VALUE OF MONEY process of finding the future value of a present amount, when accumulated interest also earns interest
compounding
34
TIME VALUE OF MONEY process of finding the present value of a future amount.
discounting
35
CAPITAL MGT capital originally invested (or borrowed)
PRINCIPAL
36
CAPITAL MGT amount paid for the use of capital/received for the money invested
INTEREST
37
CAPITAL MGT principal plus interest
FULL AMOUNT
38
CAPITAL MGT ratio of the interest earned in one time unit to the physical
INTEREST RATE
39
CAPITAL MGT maturity of loans, expressed in days, months, or years
TIME
40
INTEREST restricted to business transactions where the time involved is at most one year
SIMPLE INTEREST
41
INTEREST "interest on interest" which results in the principal increasing over time
COMPOUND INTEREST
42
INTEREST total amount due which consists of the principal and compound interest
COMPOUND AMOUNT
43
INTEREST number of unit of time in one year as basis for computing
CONVERSION PERIOD
44
TIME VALUE OF MONEY process of finding the future value of a present amount
COMPOUNDING
45
TIME VALUE OF MONEY process of finding the present value of a present amount
DISCOUNTING
46
TIME VALUE OF MONEY done because a sum to be received in the future is worth less than the same amount today
DISCOUNTING
47
TIME VALUE OF MONEY sum of the present values of all the payments of the annuity
PRESENT VALUE OF ANNUITY
48
TIME VALUE OF MONEY sequence of periodic payments made at regular intervals of time
ANNUITY
49
TIME VALUE OF MONEY time between successive payment dates of an annuity
PAYMENT INTERVAL
50
TIME VALUE OF MONEY time from the beginning of the first payment interval to the end of the last one
TERM OF THE ANNUITY
51
TIME VALUE OF MONEY the sum of all periodic payments at the end of the term
FUTURE VALUE OF ANNUITY
52
TIME VALUE OF MONEY value of annuity at the end of its term
FUTURE VALUE OF ANNUITY
53
TYPE OF INTEREST RATES the rate percent stated by the lenders
NOMINAL RATE
54
TYPES OF INTEREST RATES takes into account the effect of compounding
EFFECTIVE RATE
55
TYPES OF INTEREST RATES can be used to compare the annual interest between loans with diff compounding terms or conversion periods
EFFECTIVE RATE
56
TYPES OF INTEREST RATES interest rates adjusted for the expected erosion of purchasing power resulting from inflation
REAL INTEREST RATE

AAE 130 (9 decks)

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