Topic 5 of 7 · Form 3
Finance, banking and insurance
Short-term (overdrafts, trade credit, factoring), medium-term (bank loans, hire purchase, leasing) and long-term (shares, debentures, mortgages, retained profits).
Notes for this topic 1 file, in order
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Sources of finance
Short-term (overdrafts, trade credit, factoring), medium-term (bank loans, hire purchase, leasing) and long-term (shares, debentures, mortgages, retained profits).
Banking
Central bank functions; commercial bank services (current and savings accounts, loans, overdrafts, foreign exchange, safe deposit, advice, online and mobile banking); credit cards and debit cards.
Insurance
Purpose: pooling of risks; principles: utmost good faith, insurable interest, indemnity, contribution, subrogation and proximate cause. Types of insurance for businesses (fire, theft, goods in transit, fidelity guarantee, public liability, employer's liability) and individuals (life assurance, motor, household, medical). Insurable and non-insurable risks; premiums and how they are calculated.
Worked example: A building worth US$200 000 is insured for US$150 000 (under-insurance). A fire causes US$40 000 of damage. Under the average clause, how much is paid?
150 000 ÷ 200 000 × 40 000 = US$30 000
Procedure
Proposal form, premium, cover note, policy, claim form, assessor.
Check yourself
- What is meant by indemnity?
- Why is a fall in demand for a product not insurable?
- Give one difference between a bank loan and an overdraft.
Show answers
- Restoring the insured to the same financial position as before the loss, without profit.
- The risk cannot be calculated from past statistics (and the business controls it).
- A loan is a fixed amount repaid in instalments; an overdraft lets an account go below zero up to a limit, with interest on the amount used.
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