Basic finance

Module 2 Output

Submitted to:
Mrs. Genevieve Sagandoy

Submitted by: Kryzal Gansowen

PRE-TEST

1. Terms of credit do not include: D. lender’s real property

2. Three are the elements of credit except for: A. check
3. A credit instrument which is a written and signed order of a depositor upon a
bank to pay on demand the order of a bearer or designated person a specified
sum of money. D. check
4. The main source of income for banks. D. Interest on loans
5. Three are the elements of credit except for: A. check
6. One of the Cs of credit which is reflected by the applicant’s credit history. C.
character
7. A type of credit which is used for dealing in securities or goods with the
intention of making a profit through favorable price changes. D. speculative
credit
8. A classification of credit which includes all grants of credit to governments:
national, provincial, municipal and its instrumentalities. D. public credit
9. A credit instrument which is a written a signed order of a depositor upon a
bank to pay on demand the order of a bearer or a designated person a specified
sum of money. D. check
10. A type of credit which is used for dealing in securities or goods with the
intention of making a profit through favorable price changes. D. speculative
credit

IT’S YOUR TURN

Assessment 2-1

1. Interview your parents or guardians, ask them if they have ever used
credit or in your own capacity, have you ever used credit?
a. If yes, did using credit helped in any way in the family or you as the
case may be, how?

My parents were not born with generational wealth. Therefore, they

started life from scratch. Of course, given their situation, there was no better
option to gain business capital other than from loans. Luckily, most of their
loans have been fruitful. Yes, sometimes they experienced delays in
payments due to uncontrollable circumstances, yet with proper financial
management and outsourcing, they were still able to pay or request for a
refinancing agreement from the loan facilities. And according to them, loans
have been so far, so good.

b. Do you plan to use credit in the future? If so, what options would
you use? State reasons why you chose that option.

Yes, on my point of view, credit is good, it just depends on how one

uses the proceeds and how one pays it off. My first option would be my close
relatives, like parents and siblings. Loaning from them gives you higher
chances of a longer payment term, free of interest, or if there is, it will
probably be low, and they are easier to negotiate with. All you have to do is
to make sure that you stick with the deal to stay in good terms with them.
Taking advantage of them just because they are family is a big no, no. In
terms of loaning out from families, you still treat them professionally just
like how you would treat loaning facilities and banks. You wouldn’t let
money be the fire to burn your bridges, would you?
 My second option would be cooperatives. Aside from the fact that they
offer low interest rates, are not very strict with collaterals and other
requirements, their loans are usually insured, and being a member has a lot
of perks. You receive dividends, you can also open a savings account, they
have programs exclusively offered to members, etc.

2. From the discussions and your experience and that of your family’s with
regards to credit, state your impressions on the use of credit.
As I have mentioned above, credit is good. I actually consider it as a life-
saver. Without credit, it will be hard and will take so long for one who do not
have a readily accessible fund to work and earn for capital. The earliest that one
can graduate college is in his/her twenties. By that time, you are still starting
to establish a career and income is not yet stable and high. Although not
always, this is the usual situation in the Philippines. Even if we say that upon
graduating high school, you work right away while still young to be able to earn
more, but not all are lucky enough to be successful right away. This is when
credit comes in.

Loans are available to enable us to start investing early. Like buying

properties and opening businesses to earn income from, to provide us finances
to use abroad, for schooling, and more. Whatever the purpose of why we avail of
them, the most important thing is that we are positive that we are able to pay
them back. So, we should always make sure that what we use it for shall bear
fruits with which we shall use to pay our loan, at the same time there is more
left for expansion. As much as possible, we earn beyond the breakeven point of
our investments.

Activity 2-2

1. Discuss the credit instruments under promises to pay.

Promise to Pay Credit instruments

A. Charge Accounts

1. Regular Charge Account- Generally, a charge account is a line of credit

given to customers by businesses. A regular charge account usually
doesn’t have a line credit wherein customers can make purchases
without limit from the company they availed from. Incurred purchases by
the customer shall be settled in full by the end of the month, or
depending on the terms agreed upon. Late payments are charged with
interests. For example, I availed of a regular charge account from ACE
Hardware Store. By then, I can incur purchases from their store without
paying right away but rather tell them to “charge” it to my account,
which I shall be paying in full by the end of the month (if payment is on a
monthly basis).

2. Revolving Charge Account- This is one’s typical credit card. In contrast

with the regular charge account, a revolving charge account has a credit
limit, meaning, a holder can only spend or make purchases with it up to
a limited amount. To make up for such limit, the holder is not required
to make full payments of his/her expenses periodically but is allowed to
make at least minimum payments time and again. Using the example in
 number 1. above. Let’s say that I have a revolving charge account
instead of a regular one availed from a bank. The bank has given me a
credit limit of P100,000 annually. On June 3, I purchased tools and
equipment at ACE Hardware amounting to P40,000. By June 30, I am
supposed to pay to the bank at least 10% of the expenses I incurred
using my revolving charge account. That means I have to pay at least
P4,000 (P40,000 x 10%). The rest of my balance can be settled within the
term of my revolving charge account, or as stated in the agreement and
terms and conditions with the bank. What if I incurred expenses
amounting to P120,000 that year which is beyond my credit limit? The
bank will then charge me an additional interest for going beyond my
credit limit, unless otherwise stipulated.

3. Installment Account- This account is almost the same as a revolving

account. The only difference is that payments are made in installments,
usually at a fixed amount and schedule. Using the example in number
2., instead of paying my balance anytime within the term of my credit
account, the bank said I should pay my balances monthly at P8,500.

4. Charge Cards- A charge card works like a credit card but with the terms
and conditions of a regular charge account. Unlike the regular charge
account, charge cards can be used to avail of goods and services from
any stores accepting them because they are offered by banks or other
financial institutions and not by the store or company itself allowing you
credit. Yet unlike a credit card which allows you more lax payment
terms, a charge card holder needs to settle his/her credit in full at a time
set by the bank or financial institution.

5. Budget Account- Similar to an installment account, a budget account

allows a holder to accumulate expenses and pay them later on an equal
installment basis. Expenses are averaged, but if one incurs more than
the last, he/she should expect a higher amount by the next installment
payment date. This account can be offered both by banks and
businesses.

B. Promissory Note- This is a written document where one promises to pay

another a sum of money at a future date. It is a legal document which can
be used in litigations against or in favor of someone. Also, it is a financial
instrument which can be used for negotiations, meaning, it can be used for
trading or as a payment for goods, services, or can be claimed by others
aside from the present bearer. The following are the important elements to
be found on a promissory note:
a. Name/s of the maker- The maker is the person who is promising to
pay a certain sum of money. Simply, he/she is the one who made or
signed the promissory note;
b. Name of the payee- The payee is the one designated to receive the
maker’s payment and is usually the same person or entity who
provided the goods, services, money, or any sort of asset from which
the maker incurred credit from. Although it is possible that the payee
is different from the one who provided such. There are cases wherein
a promissory note does not specify the payee but instead states
 …”pay to bearer”. This means that whoever holds the promissory note
has the right to receive payment. Such promissory notes are
negotiable, meaning, it can be passed on from one to another;
c. Address and contact details of all parties mentioned in the promissory
note;
d. The face amount of the money loaned or the price of the goods and
services provided;
e. The specific due date of the loan;
f. The interest rate, if applicable;
g. The final amount to be paid by the maker after interest is applied
h. The details of a collateral, if applicable;
i. Payment terms;
j. Terms in case of default;
k. Signature of all parties involved, including witness if there is.

C. Bonds- A bond is a long-term investment security, specifically a certificate of

indebtedness issued by the government or a private entity. It involves at
least two parties. The issuer is the one who gives out the bonds to serve as
an affirmation that they are indebted to the holder of the certificate. They
issue bonds for the purpose of pooling in money for capital to use for their
company’s operations. Simply, the issuer borrows money from the public
and later on pays them back with interest. The other party is the investor.
They can be individuals or other business entities who have available funds
which they can lend to the issuers. It is an investment for them because the
money they lent earns interest. For example, the Jollibee Foods Corporation
(JFC) is planning on opening more stores in Europe. They need funding to
be able to do so. They’ll borrow money from the public by issuing bond
certificates. At a specified later date, the investors shall redeem the face
amount stated in the bonds with its entailed interest from JFC which the
latter is obligated to pay.
2. Make a sample of a promissory note.

PROMISSORY NOTE

FOR VALUE RECEIVED, I KRYZAL BAG-IW GANSOWEN, of legal age, single,

Filipino, with residence at Makbas, Dagdag, Sagada, Mountain Province, CAR,
Philippines, promise to pay without the need of demand to order of JASON
TORRES TOMAS, at his residence 11-APB, Ambiong Road, La Trinidad,
Benguet, CAR, Philippines, the amount in PESOS: FIVE THOUSAND PESOS
(P5,000.00) on or before the 23rd of December, 2023.

In addition to the foregoing, I promise to pay a fixed interest at the rate of five
(5%) percent of the amount stated above on or before the due date.

24 November 2023, 11-APB, Ambiong Road, la Trinidad, Benguet, CAR,

Philippines.

KRYZAL BAG-IW GANSOWEN

Maker

SIGNED IN THE PRESENCE OF:

JOONA DASING DOMOCMAT JOCELYN RIVERA GONZALES

Witness Witness

ACKNOWLEDGEMENT

Republic of the Philippines)

Municipality of La Trinidad I)S.S.

BEFORE ME, this 24th day of November 2023, before me, in La Trinidad,
Philippines, personally appeared:

Name of ID/ID No. Issued on/at

Kryzal Bag- iw Gansowen Passport ID/P15462647 Jan. 6, 2021, Baguio City

Known to me to be the same person who executed the foregoing instrument,

signed by her and her witnesses, and she acknowledged to me that the same is
her free and voluntary act of deed.

WITNESS MY HAND AND NOTARIAL SEAL.

Notary Public
Doc. No.: 27
Page No.: 27
Book No.: 06
Series of 2023.
Activity 2-3
1. Identify and explain the credit risks.
a. Default Risk- This is the most common type of risk being experienced by
creditors. Default risk pertains to the risk entailed with the ability of the
debtor to pay on time or to pay the agreed amount. That is why it is
important for creditors to consider the 5 Cs of a borrower: character,
capital, capacity, collateral, and condition. This is to make certain that
the borrower’s doesn’t have a default risk or at least only minimal.

b. Concentration Risk- This type of risk is experienced by financial

institutions whose major clientele is on a specific type of industry. The
factors affecting their client’s profitability indirectly affects them. For
example, a lending cooperative is composed of farmers and concentrates
on agricultural financing. If there is an economic setback in the
agricultural industry, the probability of the members paying their loans
to the cooperative becomes lower.

c. Country Risk- This pertains to a country defaulting on its financial

obligations, whether domestically or internationally. The usual factor of
this risk is when a country experiences economic slow downs due to
many reasons. The more investors, businesses, and consumers a country
has, the higher the probability of it settling its obligations. While on the
other hand, the lesser market a country has, the lesser investors it
attracts. Other more factors can affect a country’s ability to settle its
obligations.

d. Institutional Risk- In some lending contracts, a third party is

sometimes involved. They are the intermediaries. These intermediaries
are the bridges between the lender and the borrower. There are times
when contracts are not clear between the lender and the borrower
because of contractual negligence caused by the intermediaries. There
are also times when the borrower agrees to a lending contract without
actually understanding its terms and conditions or the lender did not
properly explain and inform the borrower what he/she needs to know.
Because of these misunderstanding, there is a tendency that such will
cause a delay or nonpayment of the borrower.

e. Downgrade Risk- This risk is associated with the credit ratings of the
borrowers. There are times that even a borrower with an impeccable
credit standing can have defaults. They are usually caused by certain
factors affecting the ability of the borrower to pay or his/her source of
income. For example, a sales manager who is always making timely
payments on his housing loan suddenly incurs delays because he was
laid-off from work due to redundancy within the company where he used
to work.

2. Explain in your own words the meaning of the quote by Benjamin

Franklin: “Creditors have better memories than debtors.”
This quotation is well-known all over the world, translated in many
dialects and languages. Between a creditor and a debtor, the one who bears the
risk on a loan is the creditor. This is because the contract between the two,
whether written or oral, is founded on trust and confidence. The creditor
trusting the debtor would pay off his/her loan in due time, and confident that
the latter will not default. Since the creditor’s asset is the one at stake, of
 course, he would always remember it, knowing that he is the one who bears the
loss.
On the other hand, the debtors are obliged to settle their loans to the
creditors. And of course, who likes obligations? In our humanly experiences, we
prefer to forget the things which have negative impacts on our lives, and
liabilities are considered to have negative impacts on our assets. That is why
some debtors intentionally avoid or forget their credits. Some only want to
acquire but not do its entailed responsibilities. Once they get what they want or
need, they care less whether they pay it back or not, what’s important to them
is that they got have what they desire. What’s mentioned above are the big
differences between a creditor and a debtor, and why they have contrasting
points of views.

POST ASSESSMENT
1. A written promise to pay a sum of money on demand or on a definite future
date to a designated person or bearer, it may be secured or unsecured, either
interest bearing or non-interest bearing and either negotiable or non-negotiable.
C. Promissory Note
2. A credit rating system used to assess, evaluate individual credit applicants for
ordinary short- or medium-term credit applications. B. Credit Scorecard
3. The positive awareness of the individual about the beneficial uses of loan. B.
Credit Knowledge
4. An element of credit which implies that the creditor or banker has faith in the
ability and willingness of the debtor to fulfill his obligations. D. Trust
5. A kind of delinquent debtor who is not around come paying time, but is always
around when borrowing. D. Vanishing Debtor
6. This is a purpose of loan used by farmers and farm organizations to finance the
acquisition of farm inputs such as fertilizers, chemicals seeds and the facilities
for production and other agricultural operations. A. Agricultural Credit
7. A classification of credit which refers to all grants of credit to non-government
institutions like sole proprietorship, partnerships, corporations and other
private institutions. A. Private Credit
8. The paper which contains in writing the obligations of the debtor and the rights
of the creditor. B. Credit Instrument
9. A basis of credit that can be measured by the managerial ability of the borrower
to use wisely and efficiently his loan. A. Capacity
10.A type of debtor who is conscious of their financial obligations which they
discharge promptly without the need of being reminded about them. Prompt
Payer

-End of Module 2-