FNCE20005 Chapter Notes - Chapter 10: Financial Risk, Mortgage Loan, Revolving Credit
29 Jun 2020
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Intermediation = indirect flow of funds when cash deposits are lent to a business. Disintermediation = direct flow of funds by underwriting an issue of debt securities and distributing them to investors. Debt = contract whereby the borrower promises to pay future cash flows to the lender. Size and timing of interest payments / set of rules used to calculate interest. Whether the borrower is required to pledge assets as security (collateral) Secured debt = supported by a pledge of assets. Unsecured debt = not supported by a pledge of assets. Rights of the lender if the borrow defaults. Interest rates on short-term and variable-rate debt are closely related to the interbank cash rate. Cash rate = interest rate on overnight loans between a bank and another bank. Long-term debt securities have a fixed interest rate (coupon rate) Long-term loans can have a fixed or variable interest rate. Variable interest rate = base rate + margin.
