Certified Financial Management Specialist Practice Exam

Which of the following best defines the term 'loan' in finance?

1. A deposit made in a bank

2. A sum of money borrowed that is expected to be paid back

3. Interest earned on deposits

4. An investment in securities

The correct answer is: A sum of money borrowed that is expected to be paid back

The term 'loan' in finance is best defined as a sum of money borrowed that is expected to be paid back. This definition encompasses the fundamental nature of a loan, which involves a borrower receiving a specific amount of money from a lender with the understanding that the borrower will return the principal amount along with any agreed-upon interest within a designated time frame. Loans can take various forms, including secured or unsecured loans, personal loans, mortgages, and business loans, but at their core, they all share the characteristic of a borrower-lender relationship where repayment is a key aspect. This concept is crucial in financial management as it impacts cash flow, credit considerations, and overall financial planning. The other options presented do not accurately capture the essence of what constitutes a loan. A deposit made in a bank refers to funds placed into a financial institution, interest earned on deposits relates to the returns on such funds, and an investment in securities involves purchasing financial instruments for profit. None of these alternatives embody the specific characteristics of borrowing and the obligation to repay that define a loan.