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Money  and Banking(MGT411)

Announcement of Discussion Board


This is to inform that a
 Discussion Board will be opened under the link of GDB according to the following schedule:

Opening Date and Time: Oct 23, 2012 At 12:00 AM (Mid-Night)

Closing Date and Time:    Oct 25, 2012 At 11:59 PM (Mid-Night)

Topic/Area for Discussion:
                                                         "Other Forms of Payments.    

 

Learning objectives: To understand the hidden costs associated with the use of credit card and its relationship with the core principles of money and banking.

 

Learning outcomes: It will enhance the ability of the students to understand the logic behind the operations of credit cards and the hidden cost associated with the use of these credit cards. It will also enable the student to understand that how the various costs associated with the use of these credit cards are related to the core principles of money and banking.

 

The Case:

Suppose you go to the market and purchase some goods using your credit card issued by your bank. Definitely the bank is providing you this facility in return for some profit. Keeping in view the core principles of money and banking, please explain, who is paying the extra money to the bank for providing this facility: you, merchant or both, and why? Support your answer with logical reasons.

 

Important Instructions:

 

1. Your discussion must be based on logical facts and should not exceed 80 words.

2. The GDB will remain open for 3 working days.

3. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4. Obnoxious or ignoble answer should be strictly avoided.

5. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.




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Topic: Other Forms of Payments               

 

Learning objectives: To understand the hidden costs associated with the use of credit card and its relationship with the core principles of money and banking.

 

Learning outcomes: It will enhance the ability of the students to understand the logic behind the operations of credit cards and the hidden cost associated with the use of these credit cards. It will also enable the student to understand that how the various costs associated with the use of these credit cards are related to the core principles of money and banking.

 

The Case:

Suppose you go to the market and purchase some goods using your credit card issued by your bank. Definitely the bank is providing you this facility in return for some profit. Keeping in view the core principles of money and banking, please explain, who is paying the extra money to the bank for providing this facility: you, merchant or both, and why? Support your answer with logical reasons.

 

Important Instructions:

 

1. Your discussion must be based on logical facts and should not exceed 80 words.

2. The GDB will remain open for 3 working days.

3. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4. Obnoxious or ignoble answer should be strictly avoided.

5. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

When you do an offline transaction and simply sign a charge slip, the retailer (merchant) has to pay a small percentage of your total purchase – perhaps 2%. This fee goes to the bank that issued your debit (or credit) card as an interchange fee.

Reference : http://banking.about.com/od/checkingaccounts/a/debitvscredit.htm

Nadia Gud keep it up 

I'll try my best :)

plz share the solution of gdb 411.

AN EXAMPLE FOR CREDIT CARD CONCEPT.

Priya: I want to buy a Sony digital camera costing Rs.20,000, but I don?t have any cash right now.

Raj: Why don?t you use your ICICI Bank credit card? Never heard them say ? Hum Hain Na ??

Priya: I am quite skeptic about using these cards. I pay using the card, get a bill after 30 days and pay after another 20 days. This is a maximum of 50 days interest free loan. Why does any bank do it?

If I borrow Rs.20,000 on personal loan at 11%.
Interest to be paid for 50 days = Rs. 20,000 * 11% * (50/365) = Rs. 301.40.

Here the bank is giving me a loan without interest when I use the credit card. Something is wrong somewhere!

Raj: Well? let me tell you how it works when you use your card to pay for the camera.

  • You present your ICICI Bank credit card ? a VISA card.
  • Sony World swipes your card on a machine provided by Citibank. Lets call Citibank ? the acquirer bank and the process of Sony World swiping the card on that machine ? requesting authorization .
  • Citibank communicates with the card issuer ? ICICI Bank through VISA Network to check if the card is valid and has the required credit limit.
  • ICICI Bank reviews and approves / declines which is communicated back to Sony World.
  • You sign a receipt called Sales Draft given by Citibank. This is the obligation on your part to pay the money to ICICI Bank. Data on this receipt can be captured electronically and transmitted.

At the end of day or at the end of some period Sony World chooses:

  • Sony World submits the receipt you signed to Citibank who pays Sony World the money. Sony World pays Citibank a fee called Merchant Discount . Let us say this is 6% of the sale value = 6% * 20,000 = Rs. 1200
  • Citibank sends the receipt electronically to a Visa data center which in turn sends it to ICICI Bank.
  • ICICI Bank transfers the money to a settlement bank which in turn transfers the funds to Citibank.
  • Citibank pays ICICI Bank an Interchange Fee of 4% of the;
  • sale value = 4% * 20,000 = Rs. 800
  • 20 to 50 days later ICICI Bank gets the money from you ? and you don?t pay the interest!!

Priya: Interesting! So Sony World pays more than the interest that I should have paid for the loan that I take. I, as a cardholder have the following benefits

  1. Convenience of not having to carry cash.
  2. Credit availability ? free of interest.

However what benefits does Sony World get for paying so much money?
Isn’t it more profitable for them to take cash?
They can save as much as Rs.1200.

Raj: Certainly. Some retail outlets offer you discounts if you pay by cash, don’t they?

However when you don?t count the money that you are spending, you tend to buy more! Cards encourage this ?
called impulse purchase .

If you did not have access to credit, you would not have bought the camera this month ? or may be not any time soon either. By accepting cards, the merchant is actually extending you credit at the risk of the card issuer. He pays money to the banks to carry that risk.

Priya: So ICICI Bank uses this money to pay back to us when they announce 5% cash back. They insist that the Sales draft that I sign at the retailer should also be from ICICI Bank. This means they are saving on the Interchange Fee and also pay me a part of the Merchant Discount that they get.

Raj: Exactly! If you have noticed, ICICI Bank gives you the cash back in the next credit card statement. They keep the ?cash back? money for a maximum of 60 days before passing on a part to you. This accrues them interest too.

Say if ICICI Bank earns an interest of 6% per annum for the cash they carry ?

they get Rs.1000 * 6% * (60/365) = Rs. 10

That is not huge, but money nevertheless. And when you consider that almost everyone in this city shops with a credit card these days, it is a big sum.

Priya: And that also explains why banks tie up with petrol pumps? like ICICI Bank has tied up with HPCL and I could re-fuel there without having to pay the fuel surcharge of 2.5%. The card issuer and the acquiring bank is the same and that saves interchange fees.

Raj: Good! You seem to have figured out how it all works! Let me summarize:

[All the numbers used to explain concepts in this article must be treated only as an example. Merchant Discounts may vary from bank to bank. Interchange Fee is regulated by VISA and MasterCard]

HOPE DAT HELPS A LITTLE

 

raja taimoor gud keep it up 

Bank credit-card system. Under this plan, the bank credits the account of the merchant as sales slips are received (this means merchants are paid quickly -- something they love!) and assembles charges to be billed to the cardholder at the end of the billing period. The cardholder, in turn, pays the bank either the entire balance or in monthly installments with interest (sometimes called carrying charges).

When you use a credit card, you borrow money from the issuer, who then pays the merchant. At the end of the month, the issuer sends you a statement listing your charges, and you repay the money you borrowed plus any interest. If you pay off the entire amount each month by the due date, you pay no interest.

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