Principle of Money, Credit and Banking: Credit Instruments

Principle of Money, Credit and Banking: Credit Instruments

1. CREDIT INSTRUMENTS GROUP 4: Abad, Glenford Dumaguit , Shiela Mae Estrella, Joan Malaza , Diane Joy Pace, Reymark

2. Investment credit instrument Reporter: Joan Estrella

3. Investment credit instruments are those which earn income in the form of dividends or interest. These are stocks and bonds.

4. Bonds are promises to pay the principal as well as the interest to the holder at a certain specified time indicated on the face of the instrument. They Represent as indebtedness on the part of the issuing corporation. In the issue, the corporation is called the bond issuer or the debtor; the bondholder is the creditor. The corporation has the obligation to honor its commitment to the bondholder redeeming the bond issued when it measures, to pay the principal as well as interest earned. Advantages of both are

5. It represents a safe form of investment, that the company must honor its obligation of paying its indebtedness to the bondholder upon maturity regardless of whether it is losing or making profits. I t can be use as collateral to support loans sought by the bondholder from financial institutions.  Transfer to another holder is easily done by mere endorsement and delivery of the instrument

6. Stocks are permanent invested capital of a corporation contributed by the owners (stockholders) which are evidence by certificates. It represents the stockholder’s right to a certain portion of the assets of a corporation upon liquidation and certain shares of the profits after prior claims have been paid. Stocks are transferable to third parties in such way that the holder, may in normal times, obtain immediate cash through the sale of said stock.

7. Kinds of stocks are common stock and preferred stock: Common stocks are with voting right. One share is equivalent to one vote. The common stockholder receives portion of the corporate income which remains after all other claimants have been satisfied. Preferred stocks are given preference to assets , dividends declarations of payments. They have right to a fixed dividend higher that common shares, and secondary to the interest on all classes of bonds and notes.

8. Commercial Credit Instruments and checks Reporter: Joan Estrella

9. Commercial Credit Instruments These documents are used during business transaction to replace cash. These instruments are the promissory notes, checks, bank draft, bill exchange and bank deposits.

10. A promissory note is a written promise by a person, called the maker, to another party, the payee t o pay a definite sum of money at a certain future time.

11. CHECKS   A check is a written order drawn by a depositor, the drawer , upon a bank, the drawee, to pay on demand or at a future determinable time sum of money to order or bearer, the payee.

12. Negotiation and Indorsement Uses and Limitations of Check Reporter: Diane Joy Malaza

13. Negotiation is the process of reaching an agreement through discussion. Endorsement is the signature or statement on the back of a check, indicating transfer of rights.

14. Uses of Checks in Negotiation Formal Commitment In negotiations, issuing a check signifies a formal commitment, fostering trust and solidifying the agreement between parties. Payment Facilitation Checks streamline financial transactions, providing a convenient payment method. Record Keeping Checks offer tangible records, aiding in financial documentation.

15. Endorsement in Checks Endorsement on a check signifies the transfer of rights from the original payee to another party. When a person or entity endorses a check, they are essentially providing their consent for the check to be negotiated or transferred to someone else. This endorsement can take the form of a signature on the back of the check.

16. Original Payee's Endorsement The original payee, the person or entity named on the front of the check, signs the back of the check. This act is known as an endorsement. The endorsement transforms the check into a negotiable instrument, allowing it to be transferred to someone else. Blank Endorsement A blank endorsement occurs when the original payee simply signs their name on the back of the check without specifying a new payee.

17. Special (or Restrictive) Endorsement In a special endorsement, the original payee not only signs the check but also specifies the new payee. This type of endorsement restricts the check's negotiation to the named party, adding an extra layer of security and control over the transfer. Endorsement Chain The endorsed check can continue to change hands through subsequent endorsements, creating an endorsement chain. Each endorsement signifies the transfer of rights, allowing the check to move from one party to another. Final Payee's Deposit or Negotiation The final recipient, as specified in the last endorsement, can then deposit the check into their own account or further negotiate it. The endorsement chain provides a clear record of the check's journey, and each endorser is held responsible for the legitimacy of their endorsement.

18. Uses of Endorsement in Negotiation Transferring Ownership Endorsement facilitates the transfer of ownership rights on a check, allowing further negotiation. Facilitating Business Transactions Endorsed checks contribute to smooth business transactions, enabling flexibility.

19. Limitations of Endorsement in Checks Risks : Risk of unauthorized transfers or misuse. Challenges : Ensuring clear and proper endorsement to avoid disputes.

20. Types of deposit Reporter: Shiela Dumaguit

21. DEPOSIT A deposit refers to money or assets held at a bank. When a customer makes a deposit, they place money in the bank. The bank holds the money for the customer for a set amount of time under certain conditions.

22. Types of Deposits There are two types of deposits: demand and time. Demand Deposits are the more common type of deposit. There’s generally no limit on the amount of times you can make demand deposits, and you can withdraw money at any point from a demand deposit account. Time Deposits must be held for a fixed amount of time before funds can be removed from a time deposit account. If they remove the funds early, they must typically pay the bank a fee.

23. 5 types of deposit accounts Bank deposits can either be held in demand deposit accounts or time deposit accounts.

24. Demand deposit accounts In a demand deposit account or (DDA), a customer can withdraw their money from the account at any time without paying a fee. Types of Demand deposit accounts include: Checking account : a checking account is a standard demand deposit account. Customers can deposit cash or checks into a checking account. Some customers may use direct deposit to have an employer automatically deposit their pay checks into a checking account. Savings account : a savings account is a demand deposit account that earns interest over time. When a customer makes a deposit, the bank pays them a set of percentage of interest in exchange for holding their money. Money market account : A money market account is similar to savings account, but customers may write checks to withdraw money. Customers may deposit money into this account and withdraw a certain number of times each month. Typically, these accounts earn interest similar to or higher than a savings account.

25. Time deposit accounts Also called term deposit accounts, time deposit accounts are useful for holding savings, and often offer higher annual percentage yields than regular savings accounts. Types of time deposit accounts include: Certificate of deposit (CD) : Banks call this account CD, but credit unions may use the term certificate of savings. Customers deposit money into a CD for a set amount of time. After the time has passed, the customer can withdraw the funds and collect the interest amount. Individual retirement account : customers deposit money to save for their retirement. They earn interest over time, and they can withdraw without fees at a certain date.

26. Rights of the creditor Reporter: Reymark Pace

27. In a legal and financial context, a creditor is a person or entity that has a legal right to receive payment or other performance from a debtor in accordance with the terms of a contract or other legal obligation. The rights of a creditor may vary depending on the nature of the legal obligation and the laws of the jurisdiction where the contract was formed or where the dispute is being adjudicated. However, here are some common rights that creditors typically have:

28. Right to payment: The primary right of a creditor is to receive payment from the debtor in accordance with the terms of the contract or other legal obligation. If the debtor fails to pay, the creditor may have the right to pursue legal action to collect the debt. Right to interest and other charges: In many cases, a creditor may have the right to charge interest, fees, and other charges in addition to the principal amount owed by the debtor. These charges may be set out in the contract or other legal agreement between the parties.

29. Right to security: A creditor may have the right to take security for the debt, such as a lien on property or a security interest in personal property. This can help to ensure that the creditor has some recourse if the debtor fails to pay. Right to enforce the debt: If the debtor fails to pay the debt as agreed, the creditor may have the right to pursue legal action to enforce the debt, such as by obtaining a judgment or garnishing wages. Right to setoff: In some cases, a creditor may have the right to set off the debt against any amounts owed to the debtor. For example, if the debtor owes money to a bank and also has a savings account with the bank, the bank may be able to set off the debt against the balance in the savings account.

30. The following are some of the common rights that a creditor may have in a legal and financial context. The specific rights of a creditor will depend on the nature of the legal obligation and the laws of the jurisdiction where the contract was formed or where the dispute is being adjudicated.

31. Right to defend against fraudulent claims : A creditor may have the right to defend against fraudulent or invalid claims made by the debtor, such as claims that the debt has already been paid or that the contract was formed under fraudulent or illegal circumstances. Right to enforce legal remedies: A creditor may have the right to enforce legal remedies, such as obtaining a court order or injunction to prevent the debtor from taking certain actions, or obtaining a judgment in their favor that can be enforced against the debtor's assets.

32. These personal rights of the creditor are typically protected by the laws of the jurisdiction where the contract was formed or where the dispute is being adjudicated. In addition to these rights, a creditor may also have certain duties or obligations, such as: the duty to act in good faith and to avoid taking actions that would be considered unconscionable or unfair.

33. Real Rights of a Creditor Real rights are rights that are enforceable against the world, meaning that they can be enforced against anyone who interferes with the right, regardless of whether that person is the debtor or a third party. In the context of creditor rights, real rights may refer to the creditor's rights to property or assets that serve as collateral for a debt or obligation. Here are some examples of real rights that a creditor may have:

34. Right of pledge: A right of pledge is a type of security interest in which the creditor has the right to take possession of and sell the pledged property in order to satisfy the debt. For example, a bank may take a security interest in a borrower's car or home as collateral for a loan, and may have the right to repossess and sell the property if the borrower defaults on the loan. Right of mortgage: A right of mortgage is a type of security interest in which the creditor has a lien on real property (such as land or a building) as collateral for a debt or obligation. If the debtor fails to repay the debt, the creditor may have the right to foreclose on the property and sell it to satisfy the debt.

35. When a debtor fails to fulfil their obligations under a contract or legal obligation, a creditor may have certain remedies available to them to enforce the debt or seek compensation for damages. Some common remedies that a creditor may have include:

36. Legal action: A creditor may choose to initiate legal action against the debtor in order to seek compensation for the debt or damages. This may involve filing a lawsuit, obtaining a court order or judgment, or taking other legal action to recover the debt. Collection agencies: A creditor may also choose to work with a collection agency to help recover the debt. Collection agencies typically charge a fee for their services and may use a variety of techniques to recover the debt, including phone calls, letters, and other forms of communication with the debtor.

37. Seizure of assets: In cases where the debt is secured by collateral, such as a mortgage or lien on property, a creditor may have the right to seize the collateral in order to satisfy the debt. This may involve foreclosure on a home or repossession of a car or other asset. Garnishment: A creditor may also be able to garnish the debtor's wages or bank accounts in order to recover the debt. This involves obtaining a court order or judgment and having a portion of the debtor's income or assets directed to the creditor. Negotiation: In some cases, a creditor may choose to negotiate with the debtor in order to come to an agreement on how the debt will be repaid. This may involve modifying the terms of the original contract or agreeing to a repayment plan that is more feasible for the debtor.

38. These are just a few of the remedies that a creditor may have available to them in the event of a debt or obligation. The specific remedies that are available will depend on the nature of the debt, the terms of the original contract, and the laws of the jurisdiction where the dispute is being adjudicated.

39. Interest Payment and Pledge of Mortgage Reporter: Glenford Abad

40. What Is Interest? Interest is the monetary charge for the privilege of borrowing money. Interest expense or revenue is often expressed as a dollar amount, while the interest rate used to calculate interest is typically expressed as an annual percentage rate (APR). Interest is the amount of money a lender or financial institution receives for lending out money. Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage.

41. Interest Payment - is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (i.e., The amount borrowed). It is distinct from after which the borrower may pay the lender or some third party. For example, a customer would usually pay interest to borrow from a bank, so they pay the bank an amount which is more than the amount they borrowed; or a customer may earn interest on their savings, and so they may withdraw more than they originally deposited. In the case of savings, the customer is the lender, and the bank plays the role of the borrower.

42. KEY TAKEAWAYS Interest is the monetary charge for borrowing money—generally expressed as a percentage, such as an annual percentage rate (APR). Interest may be earned by lenders for the use of their funds or paid by borrowers for the use of those funds. Interest is often considered simple interest (based on the principal amount) or compound interest (based on principal and previously-earned interest). Interest is often associated with credit cards, mortgages, car loans, private loans, savings accounts, or penalty assessments. Interest is highly dependent on macroeconomic policy dictated by the Federal Reserve's Federal funds rate.

43. History of Interest Rates This cost of borrowing money is considered commonplace today. However, the wide acceptability of interest became common only during the Renaissance. Interest is an ancient practice; however, social norms from ancient Middle Eastern civilizations, to Medieval times regarded charging interest on loans as a kind of sin. This was due, in part because loans were made to people in need, and there was no product other than money being made in the act of loaning assets with interest. The moral dubiousness of charging interest on loans fell away during the Renaissance. People began borrowing money to grow businesses in an attempt to improve their own station. Growing markets and relative economic mobility made loans more common and made charging interest more acceptable. It was during this time that money began to be considered a commodity, and the opportunity cost of lending it was seen as worth charging for.

44. Common Applications of Interest There are countless ways a person can charge or be charged interest. Below are some common examples of where interest may be earned by one party and paid by another.

45. Credit cards: Among the methods of borrowing money that incurs the highest amount of interest, credit cards are known for having a high APR. Consumers may make minimum monthly instalment payments; in return, interest expense may accumulate and is earned by the credit card providers/underlying financial institutions. Mortgages: Among the longest-term loans, mortgages often incur interest over the entirety of their potential 30-year term. Though interest may be assessed as a fixed or variable rate, it is theoretically reduced over time as the borrower pays down the original loan principal amount.

46. Auto loans: An example of a shorter-term loan, auto loans are often awarded for terms up to six years. Interest is often charged as a fixed rate, and the dealership extending credit may have an in-house financing department that collects the interest revenue. Student loans : During COVID-19, student loan payments were paused, and prevailing loan rates were dropped to 0%. This meant that for a while, all loans incurred no interest assessments.

47. Savings accounts: Often a positive type of interest for most consumers, savings accounts earn monthly interest assessments. Also called dividends, consumers have these deposits are automatically credited to your account. Invoices: Though many companies may assess a late fee, some companies choose to assess an interest charge on outstanding and late invoices. The idea is since the late payer is technically borrowing money from the invoice holder, the invoice holder is due interest.

48. Advantages and Disadvantages of Paying Interest Interest for Borrowers Pros May be the result of much-needed capital; relatively-speaking, it may be worth the small expense during emergencies. Is a result of building a strong credit history May be used to leverage returns and generate higher profits

49. Cons Is a real, often monthly expense requiring cash outlay Is usually paid before any principal balance can be paid down May compound and become overwhelming for a borrower to overcome Are contractually obligated to be paid

50. Interest for Lenders Pros May provide source of cash flow if interest payments are collected monthly/frequently May be a passive source of income May provide a consistent stream of income if the borrower is reliable in their payments Is a more efficient use of capital instead of not loaning it out

51. Cons Will increase a tax payers tax liability May be lower than what could have been earned had the lender deployed capital for their own investment purpose May attract negative attention in some situations depending on the borrower, rate of interest, and circumstance

52. Interest and Macroeconomics A low-interest-rate environment is intended to stimulate economic growth so that it is cheaper to borrow money. This is beneficial for those who are shopping for new homes, simply because it lowers their monthly payment and means cheaper costs. When the Federal Reserve lowers rates, it means more money in consumers' pockets, to spend in other areas, and more large purchases of items, such as houses. Banks also benefit from this environment because they can lend more money. However, low-interest rates aren't always ideal. A high-interest rate typically tells us that the economy is strong and doing well. In a low-interest-rate environment, there are lower returns on investments and in savings accounts, and of course, an increase in debt which could mean more of a chance of default when rates go back up.

53. What Is a Mortgage? A mortgage is a type of loan used to purchase or maintain a home, plot of land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property then serves as collateral to secure the loan. A borrower must apply for a mortgage through their preferred lender and ensure that they meet several requirements, including minimum credit scores and down payments. Mortgage applications go through a rigorous underwriting process before they reach the closing phase. Mortgage types, such as conventional or fixed-rate loans, vary based on the needs of the borrower.

54. KEY TAKEAWAYS Mortgages are loans that are used to buy homes and other types of real estate. The property itself serves as collateral for the loan. Mortgages are available in a variety of types, including fixed-rate and adjustable-rate. The cost of a mortgage will depend on the type of loan, the term (such as 30 years), and the interest rate that the lender charges. Mortgage rates can vary widely depending on the type of product and the qualifications of the applicant.

55. How Mortgages Work Individuals and businesses use mortgages to buy real estate without paying the entire purchase price up front. The borrower repays the loan plus interest over a specified number of years until they own the property free and clear. Most traditional mortgages are fully-amortizing. This means that the regular payment amount will stay the same, but different proportions of principal vs. interest will be paid over the life of the loan with each payment. Typical mortgage terms are for 15 or 30 years. Mortgages are also known as liens against property or claims on property. If the borrower stops paying the mortgage, the lender can foreclose on the property.

56. The Mortgage Process Would-be borrowers begin the process by applying to one or more mortgage lenders. The lender will ask for evidence that the borrower is capable of repaying the loan. This may include bank and investment statements, recent tax returns, and proof of current employment. The lender will generally run a credit check as well. If the application is approved, the lender will offer the borrower a loan of up to a certain amount and at a particular interest rate. Homebuyers can apply for a mortgage after they have chosen a property to buy or even while they are still shopping for one, thanks to a process known as pre-approval. Being pre-approved for a mortgage can give buyers an edge in a tight housing market because sellers will know that they have the money to back up their offer.

57. Once a buyer and seller agree on the terms of their deal, they or their representatives will meet at what’s called a closing. This is when the borrower makes their down payment to the lender. The seller will transfer ownership of the property to the buyer and receive the agreed-upon sum of money, and the buyer will sign any remaining mortgage documents. The lender may charge fees for originating the loan (sometimes in the form of points) at the closing.

58. Types of Mortgages Fixed-Rate Mortgages The standard type of mortgage is fixed-rate. With a fixed-rate mortgage, the interest rate stays the same for the entire term of the loan, as do the borrower's monthly payments toward the mortgage. A fixed-rate mortgage is also called a traditional mortgage .

59. Adjustable-Rate Mortgage (ARM) With an adjustable-rate mortgage (ARM), the interest rate is fixed for an initial term, after which it can change periodically based on prevailing interest rates. The initial interest rate is often a below-market rate, which can make the mortgage more affordable in the short term but possibly less affordable long-term if the rate rises substantially. ARMs typically have limits, or caps, on how much the interest rate can rise each time it adjusts and in total over the life of the loan.

60. Interest-Only Loans Other, less common types of mortgages, such as interest-only mortgages and payment-option ARMs, can involve complex repayment schedules and are best used by sophisticated borrowers. These types of loans may feature a large balloon payment at its end. Many homeowners got into financial trouble with these types of mortgages during the housing bubble of the early 2000s.

61. Reverse Mortgages As their name suggests, reverse mortgages are a very different financial product. They are designed for homeowners age 62 or older who want to convert part of the equity in their homes into cash. These homeowners can borrow against the value of their home and receive the money as a lump sum, fixed monthly payment, or line of credit. The entire loan balance becomes due when the borrower dies, moves away permanently, or sells the home.

62. IMPORTANT : If you have a mortgage, you still own your home (instead of the bank). Your bank may have loaned you money to purchase the house, but rather than owning the property, they impose a lien on it (the house is used as collateral, but only if the loan goes into default). If you default and foreclose on your mortgage, however, the bank may become the new owner of your home.

63. Rights of the creditor Reporter: Reymark Pace

64. In a legal and financial context, a creditor is a person or entity that has a legal right to receive payment or other performance from a debtor in accordance with the terms of a contract or other legal obligation. The rights of a creditor may vary depending on the nature of the legal obligation and the laws of the jurisdiction where the contract was formed or where the dispute is being adjudicated. However, here are some common rights that creditors typically have:

65. - Right to payment: The primary right of a creditor is to receive payment from the debtor in accordance with the terms of the contract or other legal obligation. If the debtor fails to pay, the creditor may have the right to pursue legal action to collect the debt. - Right to interest and other charges: In many cases, a creditor may have the right to charge interest, fees, and other charges in addition to the principal amount owed by the debtor. These charges may be set out in the contract or other legal agreement between the parties.

66. - Right to security: A creditor may have the right to take security for the debt, such as a lien on property or a security interest in personal property. This can help to ensure that the creditor has some recourse if the debtor fails to pay. - Right to enforce the debt: If the debtor fails to pay the debt as agreed, the creditor may have the right to pursue legal action to enforce the debt, such as by obtaining a judgment or garnishing wages. - Right to setoff: In some cases, a creditor may have the right to setoff the debt against any amounts owed to the debtor. For example, if the debtor owes money to a bank and also has a savings account with the bank, the bank may be able to setoff the debt against the balance in the savings account.

67. The following are some of the common rights that a creditor may have in a legal and financial context. The specific rights of a creditor will depend on the nature of the legal obligation and the laws of the jurisdiction where the contract was formed or where the dispute is being adjudicated.

68. Right to defend against fraudulent claims: A creditor may have the right to defend against fraudulent or invalid claims made by the debtor, such as claims that the debt has already been paid or that the contract was formed under fraudulent or illegal circumstances. - Right to enforce legal remedies: A creditor may have the right to enforce legal remedies, such as obtaining a court order or injunction to prevent the debtor from taking certain actions, or obtaining a judgment in their favor that can be enforced against the debtor's assets.

69. These personal rights of the creditor are typically protected by the laws of the jurisdiction where the contract was formed or where the dispute is being adjudicated. In addition to these rights, a creditor may also have certain duties or obligations, such as: the duty to act in good faith and to avoid taking actions that would be considered unconscionable or unfair.

70. Real Rights of a Creditor Real rights are rights that are enforceable against the world, meaning that they can be enforced against anyone who interferes with the right, regardless of whether that person is the debtor or a third party. In the context of creditor rights, real rights may refer to the creditor's rights to property or assets that serve as collateral for a debt or obligation. Here are some examples of real rights that a creditor may have:

71. - Right of pledge: A right of pledge is a type of security interest in which the creditor has the right to take possession of and sell the pledged property in order to satisfy the debt. For example, a bank may take a security interest in a borrower's car or home as collateral for a loan, and may have the right to repossess and sell the property if the borrower defaults on the loan. - Right of mortgage: A right of mortgage is a type of security interest in which the creditor has a lien on real property (such as land or a building) as collateral for a debt or obligation. If the debtor fails to repay the debt, the creditor may have the right to foreclose on the property and sell it to satisfy the debt.

72. When a debtor fails to fulfill their obligations under a contract or legal obligation, a creditor may have certain remedies available to them to enforce the debt or seek compensation for damages. Some common remedies that a creditor may have include: Legal action Collection agencies Seizure of assets Garnishment Negotiation

73. What is a Contract of Loan?  A Contract of Loan is a document where a person lends money (the “lender”) to another person (the “borrower”) subject to the borrower repaying the loan, sometimes with interest. The contract provides for the terms of the loan such as the (a) amount loaned; (b) interest rate; and (c) terms of payment. A Contract of Loan may also be either secured or unsecured. A secured loan refers to a loan protected by a collateral which the lender can sell if the borrower defaults on the loan. On the other hand, an unsecured loan refers to a loan that has no collateral.

74. When do you need a Contract of Loan?  A Contract of Loan is used when you lend money to another person. A loan contract is proof that you lent money to another person and that you expect that person to repay you. It is hard to rely on a verbal agreement of loan because this is difficult to prove in court and people can easily forget their commitment to pay or other important details regarding the loan. 

75. How is a Contract of Loan different from a Promissory Note? Both documents are used in transactions for lending money. However, a Contract of Loan is best used for loans involving large sums of money and when the terms of the loan are complicated.   On the other hand, use a Promissory Note if the loan involves only a small amount of money and contains simple and straightforward terms.  

76. How can a Contract of Loan protect you? The Contract of Loan can protect the lender if the borrower: Fails or refuses to repay the loan. Insists that the money or property loaned was merely a gift. Violates the terms of the loan (e.g. missed due dates, failure to put up collateral).  

77. What information do you need to create a Contract of Loan? To create your Contract of Loan you’ll need the following minimum information: The type of borrower (e.g. individual or business) as well as name and details (e.g. nationality and address). The type of lender (e.g. individual or business) as well as name and details (e.g. nationality and address). Basic terms of the loan (e.g. amount loaned, interest rate and terms of payment)

78. Thank you!