Deck 22: Finance Company Operations

Question 1

Which of the following is not a main source of funds for finance companies?

A)bank loans
B)commercial paper issues
C)bonds
D)capital

Answer 1

D

Question 2

When a finance company purchases equipment for use by another business, the finance company provides financing in the form of

A)factoring.
B)leasing.
C)a banker's acceptance.
D)a letter of credit.

Answer 2

B

Question 3

If finance companies were confident about projections of ____ interest rates, they may consider using the funds obtained from issuing bonds to offer loans with ____ rates.

A)declining; variable
B)rising; fixed
C)rising; variable
D)A and B

Answer 3

C

Question 4

When a finance company's assets are ____ interest rate sensitive than its liabilities and when interest rates are expected to ____, bonds can provide long-term financing at a rate that is completely insulated from rising market rates.

A)less; increase
B)less; decrease
C)more; increase
D)more; decrease

Question 5

The main competition for finance companies in the consumer loan market comes from

A)pension funds.
B)life insurance companies and property and casualty insurance companies.
C)commercial banks and savings and institutions.
D)mutual funds.

Question 6

Finance companies are more likely to issue bonds when their assets are presently ____ interest-rate sensitive than their liabilities, and when interest rates are expected to ____.

A)more; decrease
B)less; increase
C)more; increase
D)less; decrease

Question 7

Finance companies are exempt from state regulations.

Question 8

Finance companies are not subject to state regulations on intrastate business.

Question 9

Which of the following statements is incorrect?

A)A captive finance subsidiary's purpose is to finance sales of the parent company's products and services.
B)An operating agreement between the parent and the captive specifies the type of receivables that qualify for same and specific services provided by the parent.
C)A captive can be used to finance distributor or dealer inventories until a sale occurs.
D)A captive is rarely used to finance products leased to others.

Question 10

Which of the following is not a source of finance company funds to support operations?

A)loans from banks
B)commercial paper
C)federal funds
D)bonds

Question 11

Finance companies differ from commercial banks, savings institutions, and credit unions in that they

A)normally do not obtain funds from deposits.
B)focus on financing acquisitions by companies.
C)focus on providing residential mortgages.
D)use most of their funds to purchase stocks.

Question 12

Finance companies are subject to

A)a maximum limit on loan size.
B)ceiling interest rates on loans provided.
C)a maximum length on loan maturity.
D)regulations on intra-state banking.
E)all of the above

Question 13

A wholly owned subsidiary whose primary purpose is to finance sales of the parent company's products and services, provide wholesale financing to distributors of the parent company's products, and purchase receivables of the parent company is a

A)captive finance subsidiary.
B)factor.
C)leasing agent.
D)captive factoring agent.

Question 14

When finance companies purchase a firm's receivables at a discount, and are responsible for processing and collecting the balances of these accounts, they act as a

A)leasing agent.
B)lessor.
C)lessee.
D)factor.

Question 15

If finance companies with a greater rate-sensitivity of liabilities than assets wanted to reduce interest-rate risk, they could

A)shorten their average asset life.
B)lengthen their average asset life.
C)shorten the maturity of debt that they issue.
D)make greater use of fixed-rate loans.

Question 16

____ provide loans to firms that cannot obtain financing from commercial banks.

A)Consumer finance companies
B)Sales finance companies
C)Commercial finance companies
D)None of the above

Question 17

Compared to other lending financial institutions, finance companies have a ____ loan delinquency rate, and the average rate charged on loans is ____ on average.

A)lower; lower
B)lower; higher
C)higher; higher
D)higher; lower

Question 18

Overall, the liquidity risk of finance companies is higher than that of other financial institutions.

Question 19

Finance companies would prefer to increase their long-term debt most once interest rates

A)have declined.
B)have increased.
C)were stable for several years.
D)were projected to decline.

Question 20

____ finance companies concentrate on purchasing credit contracts from retailers and dealers.

A)Consumer
B)Sales
C)Commercial
D)None of the above

Question 21

Some finance companies offer credit card loans through a particular retailer.

Question 22

The most important risk for finance companies is ____ risk.

A)settlement
B)accounting
C)credit
D)exchange rate

Question 23

Although commercial paper is available only for short-term financing, finance companies can continually roll over their issues to create a permanent source of funds.

Question 24

Most finance companies are commonly exposed to all forms of risk below except ____ risk.

A)exchange rate
B)interest rate
C)liquidity
D)credit

Question 25

Finance companies commonly act as ____ for accounts receivable; that is, they purchase a firm's receivables at a discount and are responsible for processing and collecting the balances of these accounts.

A)brokers
B)dealers
C)market makers
D)factors
E)none of the above

Question 26

Business finance companies focus on loans to very large businesses.

Question 27

The main competition for finance companies in the consumer loan market comes from pension funds and insurance companies.

Question 28

After interest rates increase, finance companies tend to use more long-term debt to lock in the cost of funds over an extended period of time.

Question 29

Consumer finance companies primarily focus on for

A)consumer loans.
B)consumer advising.
C)consumer regulation.
D)none of the above

Question 30

The value of a finance company can be modeled as the present value of its future cash flows.

Question 31

Many consumer finance companies also provide personal loans, directly to individuals to finance purchases of large household items.

Question 32

Which of the following is not a use of finance company funds?

A)consumer loans
B)business loans
C)commercial paper
D)real estate loans
E)All of the above are uses of finance company funds.

Question 33

Finance companies can accumulate capital by doing all of the following except

A)retaining earnings.
B)issuing stock.
C)issuing commercial paper.
D)Finance companies can build their capital base by doing all of the above.

Question 34

Finance companies are regulated by the states but are not subject to regulation by an agency of the federal government.

Question 35

Finance companies participate in the ____ market to reduce interest rate risk.

A)money
B)bond
C)options
D)swap

Question 36

Consumer finance companies sometimes provide Business finance companies to individuals.

Question 37

Changes in economic growth are ____ related to a finance company's cash flows, and changes in the risk-free rate are ____ related to a finance company's cash flows.

A)positively; negatively
B)negatively; positively
C)negatively; negatively
D)positively; positively

Question 38

Historically, captive finance subsidiaries were associated with:

A)the automobile industry.
B)the oil and gas industry.
C)the textile industry.
D)department stores.