UNIT V: Analyzing the Lending Operations of Selected Financial Institutions Flashcards
TYPES OF FINANCIAL INTERMEDIARIES
- depository
- contractual savings
- investment
TYPES OF FINANCIAL INTERMEDIARIES
loan associations, mutual savings bank, credit unions
depository institutions
TYPES OF FINANCIAL INTERMEDIARIES
insurance companies and pension funds
contractual savings institutions
TYPES OF FINANCIAL INTERMEDIARIES
finance companies, mutual funds, money market mutual funds, and investment banks
investment intermediaries
FUNCTIONS OF FINANCIAL INTERMEDIARIES
- reduce transaction costs
- allow risk sharing
- solve problems created by asymmetric information
PROBLEMS CREATED BY ASYMMETRIC INFORMATION
-adverse selection
-moral hazard
PROBLEMS CREATED BY ASYMMETRIC INFORMATION
occurs before a transaction takes placce
adverse selection
PROBLEMS CREATED BY ASYMMETRIC INFORMATION
occurs after a transaction takes place
moral hazard
PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTs
- credit investigation and approval
a. five C’s
b. credit scoring - monitoring and enforcement of restrictive covenants
- credit rationing
a. first type
b, second type
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
monitoring and enforcement of restrictive covenants
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
first type credit rationing
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
second type credit rationing
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
credit scoring
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
credit scoring
PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS
involves five C’s and credit scoring
credit investigation and approval
PRACTICES ADOPTED BY FINANCIAL INTERMEDIARIES IN SCREENING OUT AND MONITORING THEIR LOAN APPLICANTS
normally used for large-value transactions
five C’s
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
capacity
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
character
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)
capital
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
collateral
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
conditions
CREDIT INVESTIGATION AND APPROVAL
what are the Five C’s?
- capacity
- character
- capital
- collateral
- conditions
OTHER PRACTICES OF CREDIT RISK MANAGEMENT
-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
THREE MAIN TYPES OF INTEREST RATES
- nominal interest rates
- real interest rates
- effective interest rates
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
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
THREE MAIN TYPES OF INTEREST RATES
rates by which the effects of compounding over time are taken into account
effective interest rates
SOURCES OF CAPITAL
-personal savings
-windfall income
-sale of fixed assets
-credit
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
refers to loans granted by financial institutions to borrowers who pay credit in the form of goods, services, or money.
CREDIT
SOURCES OF CREDIT
-private individuals
-institutional lenders
TYPES/CLASSIFICATION OF LOANS
A. based on repayment method
-short-term <1 year
-medium-term or intermediate-term loans (1 year <loan<10 year)
-long-term loans >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
TIME VALUE OF MONEY
process of finding the future value of a present amount, when accumulated interest also earns interest
compounding
TIME VALUE OF MONEY
process of finding the present value of a future amount.
discounting
CAPITAL MGT
capital originally invested (or borrowed)
PRINCIPAL
CAPITAL MGT
amount paid for the use of capital/received for the money invested
INTEREST
CAPITAL MGT
principal plus interest
FULL AMOUNT
CAPITAL MGT
ratio of the interest earned in one time unit to the physical
INTEREST RATE
CAPITAL MGT
maturity of loans, expressed in days, months, or years
TIME
INTEREST
restricted to business transactions where the time involved is at most one year
SIMPLE INTEREST
INTEREST
“interest on interest” which results in the principal increasing over time
COMPOUND INTEREST
INTEREST
total amount due which consists of the principal and compound interest
COMPOUND AMOUNT
INTEREST
number of unit of time in one year as basis for computing
CONVERSION PERIOD
TIME VALUE OF MONEY
process of finding the future value of a present amount
COMPOUNDING
TIME VALUE OF MONEY
process of finding the present value of a present amount
DISCOUNTING
TIME VALUE OF MONEY
done because a sum to be received in the future is worth less than the same amount today
DISCOUNTING
TIME VALUE OF MONEY
sum of the present values of all the payments of the annuity
PRESENT VALUE OF ANNUITY
TIME VALUE OF MONEY
sequence of periodic payments made at regular intervals of time
ANNUITY
TIME VALUE OF MONEY
time between successive payment dates of an annuity
PAYMENT INTERVAL
TIME VALUE OF MONEY
time from the beginning of the first payment interval to the end of the last one
TERM OF THE ANNUITY
TIME VALUE OF MONEY
the sum of all periodic payments at the end of the term
FUTURE VALUE OF ANNUITY
TIME VALUE OF MONEY
value of annuity at the end of its term
FUTURE VALUE OF ANNUITY
TYPE OF INTEREST RATES
the rate percent stated by the lenders
NOMINAL RATE
TYPES OF INTEREST RATES
takes into account the effect of compounding
EFFECTIVE RATE
TYPES OF INTEREST RATES
can be used to compare the annual interest between loans with diff compounding terms or conversion periods
EFFECTIVE RATE
TYPES OF INTEREST RATES
interest rates adjusted for the expected erosion of purchasing power resulting from inflation
REAL INTEREST RATE
