Podcast
Questions and Answers
What is a primary characteristic of an unsecured loan?
What is a primary characteristic of an unsecured loan?
Which of the following statements accurately describes a secured loan?
Which of the following statements accurately describes a secured loan?
What differentiates a closed-end loan from an open-end loan?
What differentiates a closed-end loan from an open-end loan?
What is a benefit of having a fixed interest payment structure for loans?
What is a benefit of having a fixed interest payment structure for loans?
Signup and view all the answers
What is typically NOT a reason for taking out a short-term loan?
What is typically NOT a reason for taking out a short-term loan?
Signup and view all the answers
Which statement is true regarding credit and its associated fees?
Which statement is true regarding credit and its associated fees?
Signup and view all the answers
Why might a borrower choose a secured loan over an unsecured one?
Why might a borrower choose a secured loan over an unsecured one?
Signup and view all the answers
How does a floating interest rate affect a loan over time?
How does a floating interest rate affect a loan over time?
Signup and view all the answers
What is the primary purpose of a bank guarantee or letter of credit in international trade?
What is the primary purpose of a bank guarantee or letter of credit in international trade?
Signup and view all the answers
Which of the following is NOT one of the 5Cs used in the analysis of creditworthiness?
Which of the following is NOT one of the 5Cs used in the analysis of creditworthiness?
Signup and view all the answers
What distinguishes a capital lease from an operating lease?
What distinguishes a capital lease from an operating lease?
Signup and view all the answers
During which stage of the lending process is the borrower's ability to repay assessed?
During which stage of the lending process is the borrower's ability to repay assessed?
Signup and view all the answers
In a loan agreement, which of the following refers to assets that cover the loan in case of default?
In a loan agreement, which of the following refers to assets that cover the loan in case of default?
Signup and view all the answers
What is typical of a capital lease?
What is typical of a capital lease?
Signup and view all the answers
What is one of the main characteristics of a letter of credit?
What is one of the main characteristics of a letter of credit?
Signup and view all the answers
Which factor is considered when analyzing the 'Conditions' in the 5C model?
Which factor is considered when analyzing the 'Conditions' in the 5C model?
Signup and view all the answers
Which of the following is NOT considered a core service provided by commercial banks?
Which of the following is NOT considered a core service provided by commercial banks?
Signup and view all the answers
What is the main difference between a loan and a line of credit?
What is the main difference between a loan and a line of credit?
Signup and view all the answers
Which of the following types of loans is specifically for purchasing residential property?
Which of the following types of loans is specifically for purchasing residential property?
Signup and view all the answers
In which payment structure does the borrower only pay interest for a certain period, with the principal due later?
In which payment structure does the borrower only pay interest for a certain period, with the principal due later?
Signup and view all the answers
Which of the following describes secured loans?
Which of the following describes secured loans?
Signup and view all the answers
Which of the following represents a liability on a bank's balance sheet?
Which of the following represents a liability on a bank's balance sheet?
Signup and view all the answers
What type of loan is primarily used for acquiring vehicles?
What type of loan is primarily used for acquiring vehicles?
Signup and view all the answers
Which of the following factors primarily determine the interest rate on a secured loan?
Which of the following factors primarily determine the interest rate on a secured loan?
Signup and view all the answers
Study Notes
Introduction to Finance - Chapter 8: Banking (Core) Services
- Commercial banks are the second tier in two-tier banking systems
- They manage accounts, deposits, credits/loans and other financial services for companies and households.
Balance Sheet of Banks
-
Assets:
- Cash and Cash Equivalents
- US Treasuries
- Municipal Bonds
- Asset-Backed Securities
- Loans (commercial and industrial, real estate, residential mortgages, home equity loans, commercial mortgages, consumer loans, credit cards, auto loans, interbank loans)
-
Liabilities and Equity:
- Checkable Deposits
- Non-Transaction Deposits
- Borrowings from Other Banks
- Bank Capital
Balance Sheet - Assets and L&E
- Assets: represent resources owned by a firm, bought to increase value and benefit operations; use of capital
- Liabilities and Equity (L&E): total liabilities show total money owed to creditors; equity represents capital provided by owners with reinvested profits, source of capital
Services of Commercial Banks
-
Core bank services:
- Payment service
- Gathering deposits
- Giving loans
-
Additional non-bank services:
- Leasing
- Factoring
- Intermediation of Financial Services (insurance, security, foreign exchange)
- Financial Services connected to core services (credit cards)
- Asset management (investment funds)
- Other services.
Loans (3.1 LOANS)
-
Loan vs Credit:
- Credit: The creditor provides a line of credit; the borrower withdraws up to a limit within maturity; no actual monetary exchange, only the opportunity for it.
- Loan: The lender provides agreed money; the borrower repays the money with interest; money is actually disbursed.
-
Loan vs Credit (Examples):
- Credit (overdraft): Bank grants withdrawal limit, charges a fee for offering the limit (money withdrawn or not).
- Loan (mortgage): Bank gives agreed capital, automatically disburses the money, borrower pays back with interests.
Why We Need Credit/Loan
-
Cause for loan (long term):
- Activities that cannot be funded by own capital, or are not funded by own capital, for example, long-term investment.
-
Cause for loan (short term):
- Securing liquidity, bridging short-term cash inflow/outflow gaps, for example overdraft (withdraw money from current account up to limit).
Categorization of Loans
- Unsecured and secured loan: (secured loans include collateral, like assets; unsecured loans do not).
- Maturity: (short, medium, long term).
- The way money is provided: (loan, credit, guarantee).
- Technical form: (open-end, closed-end).
- Interest payment: (fixed or floating).
Unsecured and Secured Loans
- Unsecured loan: No collateral, only borrower income; higher risk for lender, losses not compensated; higher interests.
- Secured loan: Borrower pledges asset (collateral) for the loan; Less risk for the lender, lower interests, lender possess asset in case of default.
Interest Payment
- Fixed: Interest rate is fixed for the loan period.
- Floating: Interest rate changes over the lifespan of the loan, based on benchmark (e.g., inflation, interbank rates).
Technical Form of Loans
- Open-end loan: Revolving credit with a predetermined spending limit; flexible use and repayment up to the limit (e.g., credit cards, overdraft).
- Closed-end loan: Funds a specific purpose for a time, often installment loans with regular payment schedules (e.g., mortgages)
Bank Guarantees and Letters of Credit
- Not actual loans; Promise from financial institution to make payment for a third party (if the bank's client fails).
- Purpose: Strengthen market participant trust, usually for international trade.
How Letter of Credit Works
- The bank provides guarantee to seller (requires security and collects fee)
- Transaction executed;seller delivers appropriate documents to the bank.
- Bank pays seller instead of buyer.
- Buyer pays the bank
Process of Lending
- Loan application
- Analysis of creditworthiness (5C's - Character, Capacity, Capital, Collateral, Conditions)
- Credit proposal
- Contract
- Disbursement
- Monitoring
- Repayment
- Collection and handling repayment problems.
Analysis of Creditworthiness (5C's)
- Character: Firm/person history, management characteristics.
- Capacity: Borrower's ability to repay (loan-to-income).
- Capital: Borrower's own capital invested.
- Collateral: Asset to compensate bank in default.
- Conditions: How borrower intends to use money.
Leasing (5. LEASING)
- A contract where a lessor (financial institution) purchases an asset; lessee (borrower) gains use and possession; lease payments, can have ownership at contract end.
- The financial institution funds the asset, the lessee has use of it.
Process of Leasing
- Lessee chooses asset
- Financial institution buys/acquires the asset and takes ownership
- Lessor grants possession and permits use to lessee; collects lease payments.
Types of Lease
- Capital lease
- Operating lease
- Leaseback
Capital vs Operating Lease
- Capital Lease: Long-term funding, ownership transferred to lessor or lessee at the end buying asset. Usually for investments in long-term assets.
- Operating Lease: Shorter term; lessee doesn't receive ownership; often used to obtain temporary use or multiple times for many clients.
Leaseback
- Firms with liquidity problems may sell assets to financial institutions, leasing them back immediately.
- The firms keeps the asset and gets money immediately.
- Ownership returned to the firm at the end.
Lease vs Loan
- Lease: Financials Institutions have ownership
- Loans: Borrower is the owner
- Lease protections for financial institutions
Deposits (6. DEPOSITS)
- Checkable deposits: Allow depositors to withdraw money at will (e.g. checking accounts).
- Non-transaction deposits: Savings, time deposits (CDs); CDs have higher interest but have penalties for early withdrawal.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Explore the core banking services discussed in Chapter 8 of Introduction to Finance. This quiz covers the roles of commercial banks, the key components of bank balance sheets, and the distinction between assets and liabilities. Test your knowledge on the essentials of banking services and financial management.
