topic 2.docx - Topic 2 Uses of Funds by Banks USES OF FUNDS...

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Topic 2. Uses of Funds by Banks USES OF FUNDS BY BANKS The more common uses of funds by banks include the following: Cash Bank Loans Investment in Securities Repurchase Agreements 1. Cash Banks also hold cash to maintain some liquidity and to accommodate any withdrawal requests by depositors. Because banks do not earn income from cash, they hold only as much cash as is necessary to maintain a sufficient degree of liquidity. 2. Bank Loans The main use of bank funds is for loans. The loan amount and maturity can be tailored to the borrower’s needs. o Types of Business Loans 1. Working Capital A common type of business loan is sometimes called a self-liquidating loan . It is designed to support ongoing business operations. A working capital loan can support the business until sufficient cash inflows are generated. These loans are typically short term, but they may be needed by businesses on a frequent basis. 2. Term Loans Banks also offer term loans, which are used primarily to finance the purchase of fixed assets such as machinery. With a term loan, a specified amount of funds
is loaned out for a specified period of time and a specified purpose. 3 . Bullet Loan o Term loans can be amortized so that the borrower makes fixed periodic payments over the life of the loan. Alternatively, the bank can periodically request interest payments, with the loan principal to be paid off in one lump sum (called a balloon payment) at a specified date in the future. This is known as a bullet loan.

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