Chapter.8-Discount and Factoring activities

document would not make the payment (risk incurred), the bank, as the holder of the valuable documents, would take an action in court to reclaim the money... Determ[r]

DISCOUNT & FACTORING ACTIVITIES

Concept

 Discount is a transaction that the Bank

will pay in advance for bills-of-exchange or undue valuable documents at the

request of the beneficiary

 Helping the holder (beneficiary) to have

money to meet payment needs

 Making undue valuable documents

Subjects & Discount Conditions

 Valuable documents to be discounted:

Bill of Exchange: The seller makes an order for the buyer to

pay at a specific of time

Bond: (Bond) - Government bonds; - Bank bonds; - Corporate

bonds

Other debt papers: Deposit certificates, savings books,

promissory notes

 Discount conditions:

Subjects participating in the discount have full legal status,

legal address, have the same location with the discount bank

Valuable documents to be discounted must be issued and

Discount value & Discount period

Discount value: is the value at maturity of the value documents

 For a Bill of exchange: The amount indicated on a bill of exchange  For a Bonds are divided into types:

 Type 1: Periodical interest payment = Face value + periodic

interest

 Type 2:

o One time interest payment in advance = Face value

o Many times interest payment in advance = Face value + interest

payable

Discount rate

 Discount rate = loan interest rate / (1 + loan interest rate)

 Discount rate = Discount interest + Commission + Discount

fee

- Discounted interest =

(Document’s value * Time of receiving discount * Discount rate) 365

- Commission = Document’s value * Commission rate - Discount fee = Document’s value * fee’s rate

 Remaining value of document = Document’s value - Discount

Note

 During the disocunt period, if the the bank

needs money, these value documents can be re-discount at the State Bank or at another commercial banks

 In the case as at due date, the issuer of value

Example

On July 1, 2017, VietinBank accept to discount of Bonds with information is as follows:

- Face value: 500,000,000 VND; - Term: years;

- Issued date: January 1, 2016; - Maturity date: January 1, 2019;

- Interest is paid annually: 10%/year

- Bonds’ holder: An Phuc Company; - Issuer: State Treasury - Discount interest rate: 14%/year; - Commission rate: 0.5%

Required:

1 Determine the discount value of the bonds?

2 Calculate the revenues receivable by the Bank?

3 What is the amount the bank must pay An Phuc Company?

Factoring

Concept: This is a financial activity in which a bank buys

back the liabilities of an entity (mainly long-term supply contracts of large customers), often on without resource

Advantages:

 Help the seller convert debts into cash to immediate

solvency for business operations and reproduction

 Save on the costs associated with tracking loan recovery  Help buyers buy goods immediately, promptly meet the

Members of factoring activities

Without recourse factoring

 Applying to “trusted-

customers”;

 The seller is guaranteed

100% payment by the bank;

 The bank is at risk when

the buyer refuses to pay partly or in whole of the debt

With recourse factoring

 Commonly applicable to all customers;

 The seller cannot

guarantee 100% payment by the bank;

Determining the amount of factoring

 Conditions to be accepted factoring by the bank

include:

- Deposit amount

- Have a current account at the bank - Pay factoring fee in full

 Amount of factoring = Amount payable - Advanced

 On January 10, 2020, Saigon Bank signed a VND 200 million factoring contract with Vinh Tan Company, contract term of months, factoring fee of 1.1%/year Vinh Tan Company must deposit 20% of value of contract

 On July 10, 2020, An Thanh Company submitted the “factoring commitment” issued by the bank to Vinh Tan Company and requested the bank to pay the amount of VND 150 million with the reason that Vinh Tan Company has not paid the purchasing goods on time

 The Bank has checked and made payment to An Thanh Company Required: Calculate the amount of factoring that the bank had paid on behalf of Vinh Tan Company?

Assume that: The balance account of Vinh Tan Company at January 10, 2020 and July 10, 2020 was VND 60 million & VND 20 million, respectively

Factoring - Example

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