- The term “subprime” refers to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself.
- Technically, the people whose credit score is below 620 is known as Subprime.
- The US Sub-prime Crisis can also be referred as Credit-derivatives led crises.
- The US Sub Prime crisis involves lending loans to the borrower who has poor credit worthiness. As the creditability of the borrower is not sound, therefore the risk involves in the deal is very high and thus the Interest rates charged by the lender would also be high.
- The loans were made to the borrower based on the “Stated Income” and in fact without verification of any proof for the same.
Many people Call it as a LIAR Loan… or loan made to a borrower of NINA (No Income No Asset) Category and NINJA (No Income No Job also) Category. - Around $ 400- $ 500 Billion were made up of these sub-prime loans.
- These Sub prime borrowers take these loans and buy a house and sell it to make some money. But, when the House prices crashed and interest rates rose, then these borrowers started defaulting as they were unable to refinance and had no option but to default on their loans.
- As the borrowers started defaulting, the bad debts of the Banks started cropping up. The Bad debts of HSBC Bank rose to $6.8 Billion. New Century Financial, America’s 2nd biggest sub-prime lender carries 23 Billion USD in debt and had adversely affected the liquidity of the banks. Due to this liquidity crisis, Century Financial became bankrupt.
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Notes on US SubPrime Crisis
Wednesday, September 24th, 2008How Does Interest Rate Affect Inflation ?
Wednesday, July 23rd, 2008How does interest rate affect inflation? Is it directly related or inversely related..
normally, increased interest rate wud mean than an individual wud earn more interest from his deposits/lendings…thereby circulatin more money and increasing inflation.
From another point of view..increased interest rate wud also mean that an individual would have to pay more interest on the money he borrows..thereby there will be less borrowing and less money circulation and thereby reducin inflation…
Which affect is more dominant ?
It is depend on bank policy for interest rate,
if rate is high, people will save more and these saving will be convert in investment. so the amount of rate will be less than the deposits and these deposits act as investment for borrower. higher investments leads to higher prices which is high inflation.
In reverse case, the rate will low , will also increase the expenditure/investment as the amount with people will higher, will lead the higher prices.
Actually when banks reduces lending schemes fr loan or say cease the bank loan facilities , increases the processing charges for loan on one side and on another side when bank increase rate for deposits and saving . In both cases the the amount increase with bank and reduces from public, so inflation rate reduces and in reverse case increases.
If rate of interest is high then people will save more in banks for getting high returns and further the money deposited by the depositors will be distributed by the bank in the form of loan for investment purposes this will lead to higher profit by both depositor and investors so they will demand more in economy then it will leads to high rate of inflation and if interest rate is less then it is vice-versa.
If rate of interest is high then people will demand less loans from banks this will lead to less investment in economy means less profit so inflation will be automatically corrected.
Corporate Finance
Wednesday, July 9th, 2008Corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analysis used to make these decisions. The primary goal of Corporate finance is to enhance corporate value, without taking excessive financial risks.
The discipline may be divided among long-term and short-term decisions and techniques.
Capital investment decisions comprise the long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders.
Short-term corporate finance decisions are called working capital management and deal with the balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (e.g., the credit terms extended to customers).
Welcome to financedir.info
Tuesday, July 8th, 2008Welcome to financedir.info the new finance related blog.