Credit, Interest Rate And Bank Lending Flashcards
What is the concept of credit?
It is a contractual agreement in which a borrower receives something of current value from the lender in exchange for future repayment, generally with interest.
What is the role of credit?
- accumulation of capital
- improvement of standard of living
- improvement of public facilities
- economic growth
- increased competition in banking sector
- tax deductibility of some interest payments
What are the types of credit?
- trade credit: offered by companies to other companies to purchase goods and services
- bank credit: offered by banks to clients
- retail banking: for phyisical persons
- wholesale banking: for legal persons
- private credit
- public credit: one party is the state
- short term credit
- medium term credit
- long term credit
- amortized credit
- credit with grace period during which only interest is paid
- credit for checking accounts
- credit for credit accounts
- mortgage, consumer, auto, investment
What is factoring?
It is a special form of credit whereby a company sells its accounts receivable at a discount. It involves the seller, the buyer and the poor soul who owes the receivables to the seller.
What is leasing?
It is a special credit agreement where the owner transfers the right to use an asset to the user for a rent for an agreed period.
It does not transfer ownership of the asset.
What is the interest rate?
It is the price a borrower must pay for loanable funds recrived from a lender. It is the price for borrowed capital.
High interest rates reduce the volume of borrowing and stimulate savings.
Low interest rates reduce savings and increase the volume of borrowing.
What is the role of the interest rate?
- it guarantees that current savings will promote economic growth through investments
- it rations the available supply of credit, providing loanable funds
- it equalises supply and demand for money
What are the types of interest rate?
Fixed interest rate: does not fluctuate during the period of the loan
Floating IR: it is an adjustable ir, which fluctuates based on LIBOR (UK), EURIBOR(EU) OR ROBOR (RO)
Mixed IR: a fixed rate for a period, followed by a floating rate
Short term IR
Long term IR
IR on loans: charged by the bank
IR on deposits: paid by the bank
Nominal IR
Real IR: adjusted for inflation
What is credit worthiness?
It is the client’s capacity to meet debt obligations.
What is solvency?
It is the measure of the firm’s ability to pay all debt and a measure of the firm’s long term survival.
What is credit scoring?
It is a statistical method used to predict the probability that a loan applicant or existing borrower will default or become delinquent.
What is credit history?
It is a record of a consumer’s ability to repay its debts.
