BFF1001 Lecture Notes - Lecture 6: Cash Management, Standard Deviation, Sharpe Ratio
Week 6: Applications of Finance
Loans
Individuals in the retail market typically access the debt market by borrowing
money and taking out a loan.
A loan allows an individual to overcome equity constraints and bring forward
future consumption to the present at a cost.
There are many types of retail lending including credit cards, personal loans,
lines of credit and mortgage finance. Financial intermediaries such as boats F
credit unions are the main provides of such loans.
To the lender: a loan is an asset
To the borrower: a loan is a liability
The interest charged on retail loans is influenced by the availability and cost of
funds, what the loan is used for, the credit worthiness of the borrower and
collateral, if any, held against the loan.
The most common and largest type of loan taken out by the general public is the
home loan.
Mortgage attributes:
Interest-only loans: each loan repayment is interest only. The entire loan
principal is due upon loan maturity.
Fully amortising loans: each loan repayment comprises of interest and
principal so that by the final repayment, the entire loan principal is paid off.
Partly amortising loans: each loans repayment comprises of interest and
principal. However, by the final repayment, there is a loan principal balance
remaining to be paid off.
Fixed rate loans: interest cost of the loan is fixed, usually over a term of 1-5
years.
Variable rate loans: interest cost is subject to change depending on how the
banks price credit and changes in the official cash
Document Summary
Individuals in the retail market typically access the debt market by borrowing money and taking out a loan. A loan allows an individual to overcome equity constraints and bring forward future consumption to the present at a cost. There are many types of retail lending including credit cards, personal loans, lines of credit and mortgage finance. Financial intermediaries such as boats f credit unions are the main provides of such loans. To the lender: a loan is an asset. To the borrower: a loan is a liability. The interest charged on retail loans is influenced by the availability and cost of funds, what the loan is used for, the credit worthiness of the borrower and collateral, if any, held against the loan. The most common and largest type of loan taken out by the general public is the home loan. Interest-only loans: each loan repayment is interest only. The entire loan principal is due upon loan maturity.
