imported>Doug Williamson |
imported>Doug Williamson |
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| The term 'credit' has a number of different related meanings in finance generally, and in banking in particular.
| | This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate). |
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| We will consider them separately in the sections below.
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| | '''Example''' |
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| | An instrument is quoted - on a <u>discount basis</u>, one period before its maturity - at a discount of 10% per period. |
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| | This means that it is currently trading at a price of 100% LESS 10% = 90% of its terminal value. |
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| == Repayable financial benefits == | | (The periodic ''yield'' on this instrument is 10% / 90% = 11.11%. So if the same instrument had been quoted on a <u>yield basis</u>, then the quoted yield per period = 11.11%.) |
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| The provision or availability of loans or other repayable financial benefits by a bank or other lender.
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| An entity which lends money, or which provides goods or services on deferred payment terms, is 'extending credit' to its customer.
| | The relationship between the periodic discount rate (d) and the periodic yield (r) is: |
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| | r = d / ( 1 - d ) |
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| Credit includes borrowings, especially short term ones relating to particular goods or services.
| | So in this case: |
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| | r = 0.10 / ( 1 - 0.10 = 0.90 ) |
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| == Creditworthiness == | | = 11.11% |
| Credit strength, or 'creditworthiness', means an entity's ability and willingness to meet its financial obligations.
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| == Banking ==
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| ==== Credit balances in banking ====
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| In relation to a bank account, a credit balance in the bank's books is one which stands in favour of the customer.
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| The bank owes money to the customer.
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| (Contrasted with a debit, or overdrawn, balance.)
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| ==== Credit items in banking ====
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| In banking, a 'credit' also means an item paid into a bank account.
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| == Book-keeping ==
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| In double entry book-keeping, every accounting transaction is recorded with both a Debit entry and a Credit entry in the accounting records.
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| ==== Credit balances in book-keeping ====
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| Credit balances represent liabilities or income.
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| (Debit balances represent assets or expenses.)
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| ==== Credit entries in book-keeping ====
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| In double entry book-keeping a 'credit entry' is one made:
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| *To increase a credit balance; or
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| *To reduce a debit balance.
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| For example, the book-keeping entry to recognise an expense paid in cash is:
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| DR Expense
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| CR Bank
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| If the bank balance is already overdrawn, the CR Bank accounting entry for the payment will increase the overdrawn bank balance (liability) in the balance sheet.
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| But if the bank balance is currently an asset (DR balance in the account holder's records), the CR Bank accounting entry for the payment will reduce the positive bank balance (asset) in the balance sheet.
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| == Taxation ==
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| #A 'tax credit' is an amount which can be used to reduce a tax liability.
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| #Under the UK tax loan relationship rules, a 'credit' is any profit or gain, for example interest income, arising from a loan relationship.
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| == Non-repayable financial benefits ==
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| A 'credit' can also mean any amount in favour the holder of the credit, entitling them either to future goods or services without further payment (or for a reduced payment) or alternatively to a repayment in cash.
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| == See also == | | == See also == |
| * [[Acceptance]] | | * [[Discount instruments]] |
| * [[Availability]] | | * [[Discount rate]] |
| * [[Bookkeeping]] | | * [[Sterling commercial paper]] |
| * [[Cash terms]] | | * [[US commercial paper]] |
| * [[Chartered Institute of Credit Management]] | | * [[Yield basis]] |
| * [[County court judgment]]
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| * [[Credit card]]
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| * [[Credit crunch]]
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| * [[Credit enhancement]]
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| * [[Credit institution]]
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| * [[Credit note]]
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| * [[Credit rating]]
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| * [[Credit risk]]
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| * [[Credit score]]
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| * [[Credit transfer]]
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| * [[Credit union]]
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| * [[Creditworthiness]]
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| * [[Daylight credit]]
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| * [[Days sales outstanding ]]
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| * [[Debit]]
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| * [[Double entry]]
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| * [[FECMA]]
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| * [[Finance ]]
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| * [[Letter of credit]]
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| * [[Loan relationship]]
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| * [[Net credit/debit position]]
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| * [[Open account]]
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| * [[Provisional credit]]
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| * [[Tax credit]]
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| [[Category:Accounting,_tax_and_regulation]]
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This term can refer either to the cash flows of an instrument (Discount instruments) or to its basis of market quotation (Discount rate).
Example
An instrument is quoted - on a discount basis, one period before its maturity - at a discount of 10% per period.
This means that it is currently trading at a price of 100% LESS 10% = 90% of its terminal value.
(The periodic yield on this instrument is 10% / 90% = 11.11%. So if the same instrument had been quoted on a yield basis, then the quoted yield per period = 11.11%.)
The relationship between the periodic discount rate (d) and the periodic yield (r) is:
r = d / ( 1 - d )
So in this case:
r = 0.10 / ( 1 - 0.10 = 0.90 )
= 11.11%
See also
