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Terms in this set (39)
Straight line depreciation
(OC-SV) / N
(F/N) x R
Sum of Years Digits Depreciation
Useful Life + (Useful Life - 1) + (Useful Life - 2) + etc.
Expected life of asset
Expected loss amount
PD x LGD x EAD
Profitability of default
Exposure at default (amount of loan)
rate sensitive assets / rate sensitive liabilities
loan pricing model
r = a + i + b - f
interest rate & funding costs
risk bearing costs
fees paid on loan
Net Income/Total Assets
Net Income/Total Equity
current assets - current liabilities
Debt to asset
total liabilities/total assets
Debt to Equity
total liabilities/total equity
Fundamental accounting equation
Assets = Liabilities + Owner's Equity
Why are self-liquidating loans desirable?
They don't absorb a firm's liquidity (working capital).
Regular/standard operating loan
separate loans each time financing is needed, so it may be cumbersome and inefficient.
Non-revolving line of credit
maximum amount of loan agreed to by parties; paying off loan does not free up funds for future. Based on (monthly) cash flow budget for a given period; if cash inflow > outflow, (partial) repayment
Revolving line of credit
(think about a credit card): borrower can borrow, repay, and re-borrow up to a credit limit; High and large turn-overs, trust to lender important
Loan repayment risk
ability to generate sufficient cash from product sales to repay loan plus interest.
Loan collateral risk
relationship between values of assets pledged as security for a loan and the outstanding balance.
ow do single and dual risk rating systems differ?
A single risk rating system, addresses the combined effects of frequency and severity. A dual risk rating system separates the measurement of frequency and severity.
Change in net interest income
Gap x Change in Interest Rates
possibility of delinquency or default be borrower.
unanticipated variations in a borrower's need for funds.
variation in cost of funds destabilizes net interest margin.
borrower refinances loan as rates decrease, resulting in lost interest payments while (higher) rate on funding source must be paid.
The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.
the ease with which an asset can be converted into cash
strengths may offset weaknesses
weakness determines rating
How can financial institutions insulate themselves from interest rate risk?
changes in equity using the duration gap
3 different comparisons
two-way comparison (two years)
-index number comparison (horizontal comparison)
-common size comparison
Systemic way to look at the determinate on the return
Recommended textbook explanations
Principles of Economics
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Krugman's Economics for AP*
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Essentials of Economics
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