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Banking & Fin - Ch 7
Banking & Finance - Bank Loans
| Question | Answer |
|---|---|
| Using Deposits to generate reveunue by putting deposits to work via loans | Asset Transformation |
| Within any portfolio of investments diversification should be used to spread out risk | Modern Portfolio Theory |
| Borrowers who are most willing to accept a high interest rate are the same borrowers who are most likely to default on their loans | Adverse Selection |
| When borrowers with certain credit characteristics are more likely to prefer one type of lender to another | Captive Borrower |
| When a borrower takes greater risks if they think the harm from those risks will somehow be minimalized | Moral Hazard |
| When banks refues to provide a loan, or when they lend less than the customer requested | Credit Rationing |
| A loan for which the amount of the payments the rate of interest, and the number of payments (or length of term) are fixed. Repaid on periodic basis. | Installment Loans |
| Some item of value backs the loan in case the borrower defaults on the loan | Secured Loan |
| An item of value that secures a loan | Collateral |
| A legal claim to the property to secure the debt | Lien |
| (Signature Loan) A loan backed only by the reputation and creditworthiness of the borrower | Unsecured Loan |
| The amount owed is flexible. The term is flexible. | Open-End Loan |
| An amount of time you have to pay the bill in full and avoid any finance charges | Grace Period |
| Reviewing the loan for soundness Making sure the loan is a prudent use of bank funds | Underwriting |
| Higher than normal rates set to offset the increased risk represented by a less-than-perfect borrower | Subprime Rates |
| Credit Reputation, Capacity, Collateral | The 3 C's of Credit |
| A company that compiles and keeps records on consumer payment habits and sells these reports to banks and other companies to use for evaluating creditworthiness | Consumer Reporting Agency |
| A three-digit number that credit granters can use in making a loan approval decision | FICO Score |
| A line of credit that has a maximum limit Can be used on an ongoing basis until the limit is reached When the balance (or a portion of the balance) is paid off, the credit can be used again until the next time the maximum is met. | Revolving Credit |
| Takes the total finance charge, divides it by the number of months in the loan term, and assigns a higher ratio of interest to the early payments | Sum of Digits Method |
| Taking the amount owed at the beginning of the billing cycle and calculating interest on that figure | Previous Balance Method |
| Subtracting payments made during the billing cycle | Adjusted Balance Method |
| The balances for each day of the billing cycle are added and then divided by the number of days in the billing cycle to yield an average figure on which the finance charge is calculated. | Average Daily Balance Method |
| When lenders create problems for consumers by making credit too easily available without regard to the borrower’s ability to pay | Predatory Lending |
Created by:
mryan396
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