Wednesday, March 26, 2014
Loan Subsidy: A number of different methods for loan subsidy
A number of different methods for loan subsidy valuation have been suggested in the literature and by project appraisal practice. Four methods are outlined and applied to a subsidized loan example taken from a prominent text book. A combination of two of those methods is recommended for practical applications. The other two methods are not recommended.
Hate paying interest? Subsidized loans are loans for which the borrower does not pay interest. Interest would normally be charged periodically according to the annual percentage rate (APR). However, with a subsidized loan the interest is paid by another party. Of course, all good things come to an end sooner or later. Find out how subsidized loans work.
A subsidy is a form of financial or in kind support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.
Although commonly extended from Government, the term subsidy can relate to any type of support - for example from NGOs or implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates).
Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical. The most common forms of subsidies are those to the producer or the consumer. Producer/Production subsidies ensure producers are better off by either supplying market price support, direct support, or payments to factors of production.
Consumer/Consumption subsidies commonly reduce the price of goods and services to the consumer. For example, in the US at one time it was cheaper to buy gasoline than bottled water. Whether subsidies are positive or negative is typically a normative judgment. As a form of economic intervention, subsidies are inherently contrary to the market's demands. Thus, they are commonly used by governments to promote general welfare (eg. housing, tuition, sustenance). However, they can also be used as tools of political and corporate cronyism.
Hate paying interest? Subsidized loans are loans for which the borrower does not pay interest. Interest would normally be charged periodically according to the annual percentage rate (APR). However, with a subsidized loan the interest is paid by another party. Of course, all good things come to an end sooner or later. Find out how subsidized loans work.
A subsidy is a form of financial or in kind support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.
Although commonly extended from Government, the term subsidy can relate to any type of support - for example from NGOs or implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates).
Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical. The most common forms of subsidies are those to the producer or the consumer. Producer/Production subsidies ensure producers are better off by either supplying market price support, direct support, or payments to factors of production.
Consumer/Consumption subsidies commonly reduce the price of goods and services to the consumer. For example, in the US at one time it was cheaper to buy gasoline than bottled water. Whether subsidies are positive or negative is typically a normative judgment. As a form of economic intervention, subsidies are inherently contrary to the market's demands. Thus, they are commonly used by governments to promote general welfare (eg. housing, tuition, sustenance). However, they can also be used as tools of political and corporate cronyism.
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