introduction to finance

• Credits are risky and payed by interest (amount not knwon)
• services aren’t risky  and payed by fee (fix amount) -->if you have money and when you have money....

• Order checks, • Pay off a loan, • Pay your bills online, • Review your bank statement, • Cash a check • Exchange money/currency • facility (withdraw everywhere) • Organize means of money

(you don’t know in advance how much it will cost), Latin creditum, meaning: “That which is entrusted or loaned (Trust or entrust)

A lender/creditor makes money available to you to borrow with a deferred repayment. In exchange for the credit, the lender gets back the money, plus interest.  The debtor gets the money to pay for and take possession for goods and services immediately.

Time for money – money for time

Most important: “financial trustworthy” à The bank must believe that you will pay back!

major risk: NO repayment!

 Fixed assets or immobilization risk,

Rate of exchange risk à Bank doesn’t have every currency, they will borrow the e.g. Real (brazil) from a bank in brazil, 

Treasury risk (case of late payment) à some customers pay back a few days later --> over night adjustment

Political risk (iran, cuba)

Risk of losing a chance (by taking the wrong customer)

Fix and flexible interes

Deviding risk, 

short-/long-term, different countries, types of industries, public/corporate, Property

Cost of funds: deposits structure (duration, remuneration (=Vergütung) …)

Or

Monetary market (can’t be changed)

+

Internal banking cost: network charges, staff…

+

Risk cost: type of borrower, credit duration, type of credit, market situation

=cost of credit

+

Net margin in the bank would like to earn

= price of credit

à This price will not be accepted by everybody, you need to cut down your costs

You need money either from deposit (free*) or you borrow it (not free = interest**)

*it’s not really free, because you must make advertisement, reputation, attraction to customers, be develop, huge network, brunches, computer system, staff

**Interest is low because of offer and demand (There is so much money in the world)

We suppose a bank extending 10M USD credit to a large international company. The bank utilizes resources from monetary market.

Let’s imagine a monetary market price at 5%.

A large intern. Cy means a credit spread at 1%

àThe borrower will pay 6% interest, but spread remains at 1% (in fact the earning is less as there are costs)

1% means the annual interest paid by borrower to bank will be 100.000 USD

Total default on this credit would be equivalent of 100 years of interest…

Bank transfer

swift

ckeck

Bill of exchange

Promissory note

Documentary collection

Letter of credit