The principal and interest What is the true definition of Compound interest? Main part amount you are borrowing

Banks have several methods for reducing information asymmetries and the problems of adverse selection and moral hazard:

1) Information Gathering: Screening Borrowers (Banks reduce adverse selection by gathering information about borrowers)

2) Reducing Default Risk: Collateral and Net Worth: (Banks use provisions in loan contracts to reduce default risk. One type of provision concerns the borrowers’ collateral and net worth)*

3) Covenants and Monitoring *

4) Interest Rates and Credit Rationing:* (Riskier borrowers must pay higher rates to compensate for banks’ losses from defaults. Banks’ safest borrowers, which pay the lowest interest rates, are usually large, well-established companies)

Which of the following explains the criteria of loan (credit) that help loan officials to make a decision in granting loans?

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  Capacity This means the financial capacity of the firm to repay the loan. Loan officers determine capacity by forecasting the firm’s earnings. Typically, they take past earnings as a baseline and make adjustments for the impact of new projects. They make sure that forecasted earnings are high enough to support the payments promised under the loan.
  
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  ■ Conditions This refers to conditions outside the firm that affect its earnings and default risk. Is the firm’s industry growing or shrinking? How strong are the firm’s competitors? Will suppliers provide the firm’s inputs at good prices? How healthy are the national and local economies?
  
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  ■ Character Firms are most likely to repay loans if their owners and managers are honest and responsible. So loan officers check the personal credit histories of applicants and look for criminal records. They check references and try to learn applicants’ reputations in their industries. They often rely heavily on personal interviews.
  
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  ■ Collateral Loan officers estimate the value of collateral. For example, they get appraisals for buildings. They also consider the collateral’s liquidity. If a bank seizes a firm’s machinery, can it sell the machinery to anyone?
  
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  ■ Capital As we’ve discussed, this is another name for net worth, the difference between a borrower’s assets and liabilities. Net worth gives borrowers something to lose if they take on risky projects. Loan officers are more likely to approve applicants with significant net worth.
  

Find the true explanation of loan criteria “Capacity”:

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  Capacity This means the financial capacity of the firm to repay the loan. Loan officers determine capacity by forecasting the firm’s earnings. Typically, they take past earnings as a baseline and make adjustments for the impact of new projects. They make sure that forecasted earnings are high enough to support the payments promised under the loan.
  

Indicate the correct listing of types of banks:

Commercial banks are split into three groups based partly on size. One is Money-center banks which can be defined as: