Erika Vicente Cagas

BSA 4

July 26, 2016

1. Define credit and discuss its significance in our economy.

Credit is the most important part of the economy. It is described as a transaction between a lender
and a borrower, in which the borrower promises to pay back the money in the future along with
interest. Credit leads to an increase in spending, thus increasing income levels in the economy.
This in turn leads to higher GDP (gross domestic product) and thereby faster productivity growth.
If credit is used to purchase productive resources, it helps in economic growth and adds to
income. Credit further leads to the creation of debt cycles.
2. Discuss the advantages and uses of credit.
Purchase Power and Ease of Purchase - Credit cards can make it easier to buy things. If you
don't like to carry large amounts of cash with you or if a company doesn't accept cash purchases
(for example most airlines, hotels, and car rental agencies), putting purchases on a credit card can
make buying things easier.
Protection of Purchases - Credit cards may also offer you additional protection if something you
have bought is lost, damaged, or stolen. Both your credit card statement (and the credit card
company) can vouch for the fact that you have made a purchase if the original receipt is lost or
stolen. In addition, some credit card companies offer insurance on large purchases.
Building a Credit Line - Having a good credit history is often important, not only when applying
for credit cards, but also when applying for things such as loans, rental applications, or even some
jobs. Having a credit card and using it wisely (making payments on time and in full each month)
will help you build a good credit history.
Emergencies - Credit cards can also be useful in times of emergency. While you should avoid
spending outside your budget (or money you don't have!), sometimes emergencies (such as your
car breaking down or flood or fire) may lead to a large purchase (like the need for a rental car or a
motel room for several nights.)
Credit Card Benefits - In addition to the benefits listed above, some credit cards offer additional
benefits, such as discounts from particular stores or companies, bonuses such as free airline miles
or travel discounts, and special insurances (like travel or life insurance.) While most of these
benefits are meant to encourage you to charge more money on your credit card (remember, credit
card companies start making their money when you can't afford to pay off your charges!) the
benefits are real and can be helpful as long as you remember your spending limits.
3. Explain the different characteristics of credit.
Poor credit risk. Even the credit rating is excellent; however, certain circumstances beyond the
control of man may induce him to fail in meeting his credit obligations.
Credit is the use of trust. Without trust, credit and the corresponding credit transactions will not
exist. Credit is extended to borrowers where lenders have trust. However, the use of credit could
be abused when the borrower itself is not serious or sincere in his obligation.

Credit is elastic. This could be expanded or contracted. Credit helps to expand the volume of
operation during periods of business boom, while during dull periods of business, it could be
contracted to prevent further losses.
Credit involves time or futurity. The creditor looks forward to the future as specified in the
credit instrument when he will receive payment from his debtor.
Credit gives rise to creditor-debtor relationships as evidenced by the use of credit
instrument. This relationship arise from the moment a creditor manifests his trust on his debtor
by giving out his goods, money or services in exchange for the promise on the part of the debtor
to pay his obligations on the date promised.
4. How does the business cycle affect the volume of credit transactions? Explain.
At the beginning of a period of prosperity a low rate of interest prevails, which rises only slowly
and gradually. Loan capital is plentiful. The expansion of production, and hence of circulation,
does indeed increase the demand for loan capital. But the increased demand is easily satisfied,
first because the money capital which was lying idle during the depression is available, and
second because the onset of a period of prosperity is accompanied by an expansion of circulation
credit. Thus, while the commodity capital of industrialists and merchants, which has to be
reconverted into money capital, has increased both in volume and in price, the necessary means
for circulating it are supplied by the increased amount of credit money. Along with this increase
in the amount of credit money its velocity of circulation is also accelerated as a result of the more
rapid turnover of commodity capital. The increased supply of loan capital, brought about by the
more extensive creation of credit money, is sufficient to meet the increased demand for loan
capital without a rise in the interest rate
5. Explain how bonds are used as a means of obtaining large amounts of capital to finance a
business.
When companies need to raise money, issuing bonds is one way to do it. A bond functions like a
loan between an investor and a corporation. The investor agrees to give the corporation a specific
amount of money for a specific period of time in exchange for periodic interest payments at
designated intervals. When the loan reaches its maturity date, the investors loan is repaid.
6. Differentiate personal loan from merchandise credit.
A personal loan is offered to the borrower as a lump-sum amount of money. With a personal
loan, you pay interest on the principal amount (the initial amount borrowed) at a fixed or variable
interest rate. The loan is paid off over a period of time agreed with your lender. With personal
loans, there is more certainty regarding the amount you are borrowing and the payments due
across the time of the loan. While merchandise credit is a store discount applied to your account
that can be used on our website and applied toward your future purchases.
7. Describe how the installment plan operates.
An Installment Plan is a repayment scheme that allows you to use your credit card to make a
transaction, and then repay the amount in piece meals over the course of months or years.
8. What are the different criteria considered in granting personal credit? Discuss.

Credit history: Qualifying for the different types of credit hinges largely on your credit history
the track record youve established while managing credit and making payments over time.
Your credit report is primarily a detailed list of your credit history, consisting of information
provided by lenders that have extended credit to you. While information may vary from one
credit reporting agency to another, the credit reports includes the same types of information, such
as the names of lenders that have extended credit to you, types of credit you have, your payment
history, and more.
Capacity: Lenders need to determine whether you can comfortably manage your payments. Your
past income and employment history are good indicators of your ability to repay outstanding
debt. Income amount, stability, and type of income may all be considered. The ratio of your
current and any new debt as compared to your before-tax income, known as debt-to-income ratio
(DTI), may be evaluated.
Collateral (when applying for secured loans): Loans, lines of credit, or credit cards you apply
for may be secured or unsecured. With a secured product, such as an auto or home equity loan,
you pledge something you own as collateral. The value of your collateral will be evaluated, and
any existing debt secured by that collateral will be subtracted from the value. The remaining
equity will play a factor in the lending decision.
Capital: While your household income is expected to be the primary source of repayment, capital
represents the savings, investments, and other assets that can help repay the loan. This can be
helpful if you lose your job or experience other setbacks.
Conditions: Lenders may want to know how you plan to use the money and will consider the
loans purpose, such as whether the loan will be used to purchase a vehicle or other property.
Other factors, such as environmental and economic conditions, may also be considered.
9. What is the importance of the Truth in Lending Act?
It is Republic Act No. 3765, which is an act requiring the disclosure of finance charges in
connection with the extension of credit. The declared policy behind the law is to protect the
people from lack of awareness of the true cost of credit by assuring full disclosure of such cost,
with a view of preventing the uninformed use of credit to the detriment of the national economy.
10. How does a businessman become a debtor and at the same time a creditor in a commercial
credit? Explain.
11. Describe an agricultural credit.
Any of several credit vehicles used to finance agricultural transactions, including loans, notes,
bills of exchange and banker's acceptances. These types of financing are adapted to the specific
financial needs of farmers, which are determined by planting, harvesting and marketing cycles.
Short-term credit finances operating expenses, intermediate-term credit is used for farm
machinery, and long-term credit is used for real-estate financing.
12. Differentiate direct loans from discount loans.
Direct loan is a loan made available to a borrower directly from the issuing bank. No third-party
is used to disperse or finalize any part of the loan. Direct loans may result in lower interest rates
and fees because of the alleviation of the middle man. While discount loan is a loan on which the
interest and financing charges are deducted from the face amount when the loan is closed. The

borrower only receives the principal after the financing charges and interest are taken out but
must repay the full amount of the loan.
13. Trace how imports and exports are conducted.
Basic Export Procedures

1. Market Research and Setting Objectives of Distribution

Selecting target markets, methods of exportation and channels
Setting foreign market objectives on pricing and terms
2. Trade Regulations
Export regulations and requirements
Overseas import regulations and requirements
Patent, trademark and copyright
3. Making Contacts
Enquiries from interested overseas buyers
Checking buyer's background from ECIC and / or banks
4. Quotation and Terms
Making offers and quotation for potential buyers
Costs, quotations and pro forma invoices, and terms of sale
5. Sales Contract
Confirming the sales contract and terms of transaction such as payment terms
6. Contract Execution
Producing or sourcing goods
Packing and labelling
Arranging shipment
Preparing exports documentation
Arranging insurance, if necessary
7. Customs Clearance
Arranging export declaration and applying for export licence when necessary
8. Getting Paid
Subject to the payment terms specified in the sales contract, the exporter should present
the required documents to the relevant parties for payment
Basic Import Procedures
1. Setting Market Objectives
Setting market objectives on pricing and terms
2. Sourcing Products
Identifying potential suppliers
Sourcing channels of distribution
3. Trade Regulations
Import regulations and requirements, and checking whether import licence is required
Patent, trademark and copyright
4. Making Contacts
Sending enquiries to suitable suppliers
5. Settling Quotation and Terms
Analysing the supplier's quotation and offers
Costs and terms of sale
6. Financing the Purchase
Preparing for working capital
Types of bank financing and application, such as exporter credit or other bank facilities

7. Sales Contract
Confirming the sales contract and terms of transaction such as payment terms
8. Preparing Payment and Insurance
Preparing payments and insurance specified in sales contract (eg. when payment term is
D/C, submit D/C application to the issuing bank; when trade term is FOB, arrange cover
note with an insurance company)
Preparing insurance, cover note, when necessary
9. Acquiring Goods
Receiving shipping advice and arrival notice
Receiving export documents from the exporter
Collecting goods from the specified shipping company or forwarder
10. Customs Clearance
Arranging customs clearance and import declaration
Basic Outward Processing Procedures
1. Manufacturing Base
Setting up / liaising for overseas production facilities (e.g. a joint venture partner)
2. Confirming Contract
Confirming the outward processing contract with the processing partner
3. Transporting Materials
Arranging shipment of the raw materials, parts or semi-manufactures to the overseas
processing partner
Arranging imports of the finished / semi-finished products
4. Manufacturing Completed
Further processing the products into the final end-product
Inspecting the finished / semi-finished products
Arranging exports of final products to the Hong Kong consignor
5. Preparing Payment
Preparing payments of the processing fee to the overseas processing partner
14. Explain the hazards of using credit.
Over Issue of Credit: Over issuance of credit is one of the big disadvantages of credit facility.
General Price level is closely related to the quantity of money in any economy. If money is issued
in excess by banks then prices will go up and purchasing power of people will suffer a lot.
Bad Debts: In the countries where monetary systems are influenced by politicians, bad debt
losses have created hurdles in the development of economy, individual business concerns and
banks. People get loans and then these loans are never refunded. Capital and funds which
Inefficient Business Concerns: It is also observed that facility which is provided to new entrants
in the business world by credit system has brought some inefficient concerns into existence. Such
inefficient business concerns create problems for all the persons and institution when they go into
liquidation. Liquidation affects each and every person dealing with that concern.
Monopolistic Exploitation: Due to availability of capital to some concerns only, it might happen
that such concerns may become able to develop powers to control the whole market and enjoy
monopoly. In the absence of capital it is relatively difficult to accumulate the large capital to get
undue advantage of sole supply or manufacture.

Borrowing by Governments: It has become a practice of governments in many developing

countries to obtain short and long term loans to meet the financing requirements. Instead of
generating funds from other effective operations governments are using credit as a resort in the
days of need. Interest and principal payments are causing problems for developing countries as a
consequence of credits.
15. How much can an insured person borrow from his insurance company?
While borrowing from your life insurance policy can be a quick and easy way to get cash in hand
when you need it, there are a few specifics to know before borrowing. Most importantly, you can
only borrow against permanent or whole life insurance. Term life insurance, a cheaper and
suitable option for many people, does not have a cash value and expires at the end of the term,
generally anywhere from one to 10 years.
A whole life policy is more expensive but has no expiration date. The term lasts the lifetime of
the insured. While the monthly premiums may be higher, the money paid in to the policy
exceeding what is needed for the death benefit is invested by the life insurance company, creating
a cash value after a few years. The whole life policy essentially has two values: the face value, or
death benefit, and the cash value that acts as a savings account. Once the money invested
increases the amount of the death benefit, the tax-free cash value can then be borrowed against. It
is also important to understand that the policy loan is not taken out of your death benefit, but
borrowed against it, and the insurance company is using your policy as collateral for the loan.
Unlike a bank loan or credit card, policy loans do not affect your credit and there is no approval
process or credit check since you are essentially borrowing from yourself. When borrowing on
your policy, no explanation is required about how you plan to use the money, so it can be used for
anything from bills to vacation expenses. The loan is also not recognized by the IRS as income,
therefore it remains free from tax. However, the policy loan is still expected to be paid back with
interest, though the interest rates are typically much lower than on a bank loan or credit card, and
there is no mandatory monthly payment.
Even with low interest rates and a flexible payback schedule, it is still important for the loan to be
paid back in a timely manner. Unless it is paid out of pocket, interest is added to the balance and
accrues whether the bill is being paid monthly or not, putting your loan at risk of exceeding the
policy's cash value and causing your policy to lapse. Insurance companies generally give many
opportunities to keep the loan current and prevent lapsing. However, in the event of a policy
lapse, taxes must be paid on the cash value. If the loan is not paid back before the insured person's
death, the loan amount plus any interest owed is subtracted from the amount the beneficiaries are
set to receive from the death benefit.