Bow Tie Loan – Definition

Cite this article as:"Bow Tie Loan – Definition," in The Business Professor, updated February 23, 2020, last accessed October 28, 2020, https://thebusinessprofessor.com/lesson/bow-tie-loan-definition/.

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Bow Tie Loan Definition

Bow-tie loans are primarily short term variable rate loans. Bow-tie loan is issued with a predetermined interest rate. It delays any unpaid interest charges above a predetermined interest rate by rolling the interest into the principal amount. This may lead to an extension of time for repayment since there will be an increment in the principal sum.

Bow tie loan’s interest is affected by the rising and falling in the market interest rates. This interest cannot rise above the predetermined interest rate limit, no matter the fluctuation in the market rate.

A Little More on What is a Bow Tie Loan

For example, a company or an individual might take out a bow tie loan with the interest rate at 12% with a maximum rate of 20%. Interest on the loan will fluctuate with the market, but if the interest rate exceeds 20% the debtor will be liable to pay for the increment but the payment of the increment will be deferred until the loan is mature.

Bow Tie Loans and Negative Amortization

Bow tie loan is an example of negative amortization. Negative amortization is when the principal of a loan increases because the interest accrued over time is not covered by the loan payments.

Some other examples of negative amortization are;

  • Student loans
  • Unpaid credit card balance
  • Adjustable-rate mortgages (ARMs)
  • Real Estate Loans

The intention of the negative amortization loan is for flexible payment options where it allows for minimum monthly payment rather than full payment.

The loan is for people who are financially stable, or who got paid after the completion of large projects or for homes that appreciate faster than the interest rate of the mortgage

Reference for “Bow tie loan”

https://www.investopedia.com/terms/b/bow-tie-loan.asp

https://financial-dictionary.thefreedictionary.com/Bow+Tie+Loans

www.investorwords.com/16991/bow_tie_loan.html

http://www.niftylivecharts.com/blog/what-is-a-bow-tie-loan/

https://www.shmoop.com/finance-glossary/bow-tie-loan.html

Academic research on “Bow tie loan”

Preventive Key Risks Indicators, Chapelle, A. (2013). Preventive Key Risks Indicators. Available at SSRN 2206845. By addressing three of the most common debates surrounding indicators, this paper attempts to progress the reflection on KRIs for the financial industry. It insists on the identification of risk drivers prior to any effective risk management and suggests four types of metrics leading to preventive KRIs: failed KPIs, failed KRIs, cause of the cause and environment. It distinguishes indicators for transactional and monitoring phases and comments on design and governance of key risks indicators.

The Electoral Foundations of Japan’s Financial Politics: The Case of Jusen, Rosenbluth, F. M., & Thies, M. F. (2001). The Electoral Foundations of Japan’s Financial Politics: The Case of Jusen. Available at SSRN 1158646. This paper locates Japan’s financial policies in the context of electoral incentives. The collapse of Japan’s economic bubble in 1990 exposed the rot in the banking system, hidden for decades by a Liberal Democratic Party (LDP) government intent on maintaining favor with local support groups, and protecting inefficient small banks. In a move wholly uncharacteristic of Japan’s postwar politics, the LDP ultimately forced the banks to absorb huge losses rather than require taxpayers to bail out their mortgage-lending subsidiaries (jusen). We compare the government’s subsequent bank bailout scheme with past government action and find that the government’s objectives have shifted from boosting bank profits to ensuring their prudential regulation. We conclude on an optimistic note about the prospects for more public-goods oriented politics in Japan.

Ireland and Iceland in Crisis C: Iceland’s Landsbanki Icesave, Zeissler, A. G., Piontek, T., & Metrick, A. (2014). Ireland and Iceland in Crisis C: Iceland’s Landsbanki Icesave. Yale Program on Financial Stability Case Study. At year-end 2005, almost all of the total assets of Iceland’s banking system were concentrated in just three banks (Glitnir, Kaupthing, and Landsbanki). These banks were criticized by certain financial analysts in early 2006 for being overly dependent on wholesale funding, much of it short-term, that could easily disappear if creditors’ confidence in these banks faltered for any reason. Landsbanki, followed later by Kaupthing and then Glitnir, responded to this criticism and replaced part of their wholesale funding by using online accounts to gather deposits from individuals across Europe. In Landsbanki’s case, these new deposits were marketed under the name “IceSave” and legally held in branch offices in the United Kingdom and the Netherlands. When Landsbanki failed in October 2008, the obligation to repay depositors fell upon Iceland’s deposit insurance fund, not upon the British and Dutch deposit insurance funds. However, the Icelandic fund did not have nearly enough money to repay all eligible depositors in the three major Icelandic banks, all of which had failed, so the Icelandic government made the controversial decision to repay only domestic depositors.

Creating a Calamity, Rasmussen, R. K. (2006). Creating a Calamity. Vanderbilt Law and Economics Research Paper, (06-18), 06-17. This essay is part of a symposium where the contributors were asked to identify their “favorite” commercial calamity. It takes a lot to create a calamity in the commercial arena. Transactional attorneys spend a good deal of their time drafting around the calamities of the past. The Supreme Court’s decision in Till v. SCS Credit Corp., 541 U.S. 465 (2004), nevertheless deserves the label. The issue before the Court was straight-forward – how should bankruptcy courts ascertain the appropriate interest rate in a Chapter 13 plan. At one level the case is a calamity in that the Court failed to produce a majority opinion. This issue simply called for a clear rule. While some rules may be better than others, the overriding concern should have been to provide definitive guidance on this oft recurring issue. Here, the Court simply failed.

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