Anticipated income theory developed in 1945 by H. V Prochnow and presented on his book named “ Term loan and Theories of Bank Liquidity”
- Maintaining cash and near cash assets even though increases liquidity, but it forgoes income opportunity.
- So bank should go for term loan of different dimension where from principal and interest can be received on installment basis.
- In fact it argues that the installment CIF can be a source of continuous liquidity
H.V. Prochnow has considered the following factors in his theory
• Maintaining liquidity in the form of cash is not important as installment CIF of term loan is enough to fulfill liquidity requirement.
• Bond and securities can be used as collateral to give term loan so bank can collect fund in times of emergencies by selling them in the secondary market or by keeping it as collateral to central bank.
• Bank must given such long term loan from which the fund be recollected on due time.
• From the long and mid-term loan amortization schedule, the flow of interest and principle repayment can be known and it gives a picture of future liquidity position. As a result the necessary plan can be formulated in advance.
• It provides a broader spectrum of firm's financial structure compared to other theories of liquidity.
More from this Section
- Sweep account
Sweep account is an arrangement in which any balances above a certain amount in a corporation’s ...
Consol is a perpetual bond with no maturity date and no repayment of principal that periodically ...
- Bill of Lading
Bill of Lading is a receipt issued by a shipowner or his agent incorporating a contract ...
- Abusive tax shelter
Abusive tax shelter is a limited partnership that the IRS judges to be claiming tax deductions ...
- Bank holding companies
Bank holding companies is the companies that own one or more banks. ...