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Credit is the provision of resources
(such as granting a loan) by one party to another party where that second
party does not reimburse the first party immediately, thereby generating a
debt, and instead arranges either to repay or return those resources (or
material(s) of equal value) at a later date. It is any form of deferred
payment.[1] The first party is called a creditor, also known as a lender,
while the second party is called a debtor, also known as a borrower.
Movements of financial capital are normally dependent on either credit or
equity transfers. Credit is in turn dependent on the reputation or
creditworthiness of the entity which takes responsibility for the funds.
Credit need not necessarily be based on formal monetary systems. The credit
concept can be applied in barter economies based on the direct exchange of
goods and services, and some would go so far as to suggest that the true nature
of money is best described as a representation of the credit-debt
relationships that exist in society (Ingham 2004 p.12-19).
Credit is denominated by a unit of account. Unlike money (by a strict
definition), credit itself cannot act as a unit of account. However, many
forms of credit can readily act as a medium of exchange. As such, various
forms of credit are frequently referred to as money and are included in
estimates of the money supply.
Credit is also traded in the market. The purest form is the credit default
swap market, which is essentially a traded market in credit insurance. A
credit default swap represents the price at which two parties exchange this
risk – the protection "seller" takes the risk of default of the credit in
return for a payment, commonly denoted in basis points (one basis point is
1/100 of a percent) of the notional amount to be referenced, while the
protection "buyer" pays this premium and in the case of default of the
underlying (a loan, bond or other receivable), delivers this receivable to
the protection seller and receives from the seller the par amount (that is,
is made whole).
Contents [show]
1 Trade credit
2 Consumer credit
3 See also
4 References
5 External links
[edit] Trade credit
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