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
- D/P (documents against payment)
D/P (documents against payment) refer to shipping documents presented to a bank on a collection basis to be passed to the buyer (drawee) when
- Barbell strategy
Barbell strategy is a fixed income strategy in which the maturity's of the securities included in the portfolio are concentrated at two
- Blow-off top
Blow-off top is a steep and rapid increase in price followed by a steep and rapid drop. This is an indicator seen in charts and used in technical analysis of
- Retail banks
Retail banks is the smaller-denomination loans extended to individuals and families as well as to smaller businesses.
- Retention of Title Clause
Retention of Title Clause is a contract clause whereby a seller declares his intention to retain title or ownership over the contract goods until
Covenant is a definite provision in a loan contract.
- Sweep accounts
Sweep accounts is the contracts executed between a bank and some of its deposit customers that bank to transfer funds (usually overnight)