Introduction
A potential buyer of a building vessel is seeking for a loan of 15 USD to cover the full price for the vessel. The market value of the vessel and the current financial crisis pose a danger to the financial institution. This is a proposal on how the bank can secure its position in this agreement.
Discussion
The market value is the highest price a buyer is willing to offer for a commodity and the lowest that a seller can accept for the commodity. Market values offer the actual financial situation surrounding a financial decision. However, during a financial crisis the market value can be misleading since these market values are based on liquidity of assets and not the fundamental value of an asset . The fundamental value of a commodity provides the future earning power of a commodity, and the solvency by the borrower. Solvency is the ability by a borrower to pay their debts. The financial institution should conduct a research on the earning power of the building vessel to determine the solvency of the borrower. Once the, solvency has been established the financial institution should demand for guarantors for the loan and the loan agreement should have a clear indications of the time frame within which the payment installments should be made, including the frequency. The borrower should also provide the financial institution with other valuable collateral that will act as security for the loan.
Conclusion
In conclusion, financial institutions are faced with the hard task of determining the solvency of borrowers during a financial crisis. An in-depth study into their proposal comes in handy in determining a commodities earning power, which greatly influences the borrowers solvency. For financial institutions to thrive, they need to ensure the solvency of their borrowers before getting into lending agreements with them.
References
Evans, A., 2013. Margin lending: a brief introduction. FieldFisher.
