CBI Exam Notes: Chapter 3- Principles and Practice of Bank Lending QUESTIONS AND CORRECT DETAILED ANSWERS

What is lending? - Lending can be defined as the giving of an asset with the expectation that an equivalent value will be returned at a future point of time. How are loans treated in financial statements? - A loan is an asset for the lender (creditor) and a liability for the borrower (debtor) In regards to loans, what is the principal? - The principal is the amount of the loan What are the different types of interest for loans? - - fixed interest: where rates are fixed for a specified period of time - variable interest: where rates vary in relation to a particular benchmark rate e.g. bank rate - capped interest: where rates can fluctuate but are subject to a specified ceiling, or cap. - simple interest: where interest is determined by multiplying the principal by the rate by the number of time periods - compound interest: where interest is charged on the principal amount plus whatever interest has already been incurred. What is bank rate? - Bank Rate is the interest rate at which a nation's central bank lends money to domestic banks, often in the form of very short-term loans. How can the bank rate be used to impact the economy? - Lower bank rates can help to expand the economy by lowering the cost of funds for borrowers, and higher bank rates help to rein in the economy when inflation is higher than desired. What is the standard variable rate (SVR)? - The standard rate of interest that lenders use, and is the rate to which a borrower is usually automatically switched when any fixed or initial offer rate period expires. In the UK it varies with bank rate and tends to be a few percentage points higher than bank rate.