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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
Q

THREE MAIN TYPES OF INTEREST RATES

quoted or stated rates by which the compounding process and inflation are not taken into consideration

A

nominal interest rates

26
Q

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

A

real interest rates

27
Q

THREE MAIN TYPES OF INTEREST RATES

rates by which the effects of compounding over time are taken into account

A

effective interest rates

28
Q

SOURCES OF CAPITAL

A

-personal savings
-windfall income
-sale of fixed assets
-credit

29
Q

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

A

CREDIT

30
Q

refers to loans granted by financial institutions to borrowers who pay credit in the form of goods, services, or money.

A

CREDIT

31
Q

SOURCES OF CREDIT

A

-private individuals
-institutional lenders

32
Q

TYPES/CLASSIFICATION OF LOANS

A

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

33
Q

TIME VALUE OF MONEY

process of finding the future value of a present amount, when accumulated interest also earns interest

A

compounding

34
Q

TIME VALUE OF MONEY

process of finding the present value of a future amount.

A

discounting

35
Q

CAPITAL MGT

capital originally invested (or borrowed)

A

PRINCIPAL

36
Q

CAPITAL MGT

amount paid for the use of capital/received for the money invested

A

INTEREST

37
Q

CAPITAL MGT

principal plus interest

A

FULL AMOUNT

38
Q

CAPITAL MGT

ratio of the interest earned in one time unit to the physical

A

INTEREST RATE

39
Q

CAPITAL MGT

maturity of loans, expressed in days, months, or years

A

TIME

40
Q

INTEREST

restricted to business transactions where the time involved is at most one year

A

SIMPLE INTEREST

41
Q

INTEREST

“interest on interest” which results in the principal increasing over time

A

COMPOUND INTEREST

42
Q

INTEREST

total amount due which consists of the principal and compound interest

A

COMPOUND AMOUNT

43
Q

INTEREST

number of unit of time in one year as basis for computing

A

CONVERSION PERIOD

44
Q

TIME VALUE OF MONEY

process of finding the future value of a present amount

A

COMPOUNDING

45
Q

TIME VALUE OF MONEY

process of finding the present value of a present amount

A

DISCOUNTING

46
Q

TIME VALUE OF MONEY

done because a sum to be received in the future is worth less than the same amount today

A

DISCOUNTING

47
Q

TIME VALUE OF MONEY

sum of the present values of all the payments of the annuity

A

PRESENT VALUE OF ANNUITY

48
Q

TIME VALUE OF MONEY

sequence of periodic payments made at regular intervals of time

A

ANNUITY

49
Q

TIME VALUE OF MONEY

time between successive payment dates of an annuity

A

PAYMENT INTERVAL

50
Q

TIME VALUE OF MONEY

time from the beginning of the first payment interval to the end of the last one

A

TERM OF THE ANNUITY

51
Q

TIME VALUE OF MONEY

the sum of all periodic payments at the end of the term

A

FUTURE VALUE OF ANNUITY

52
Q

TIME VALUE OF MONEY

value of annuity at the end of its term

A

FUTURE VALUE OF ANNUITY

53
Q

TYPE OF INTEREST RATES

the rate percent stated by the lenders

A

NOMINAL RATE

54
Q

TYPES OF INTEREST RATES

takes into account the effect of compounding

A

EFFECTIVE RATE

55
Q

TYPES OF INTEREST RATES

can be used to compare the annual interest between loans with diff compounding terms or conversion periods

A

EFFECTIVE RATE

56
Q

TYPES OF INTEREST RATES

interest rates adjusted for the expected erosion of purchasing power resulting from inflation

A

REAL INTEREST RATE

AAE 130 (9 decks)

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