Deck 22: Finance Operations

Question 1

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.

Answer 1

D

Question 2

____ 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

Answer 2

C

Question 3

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.

Answer 3

A

Question 4

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

Question 5

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 6

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 7

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 8

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

Question 9

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

Question 10

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 11

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 12

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 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

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 15

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 bankers acceptance.
D)a letter of credit.

Question 16

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

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

Question 17

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 18

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)savings and loan associations.
D)savings banks.
E)credit unions and commercial banks.

Question 19

Finance companies are federally regulated when they

A)are independently owned.
B)are a subsidiary of a savings institution.
C)act as bank holding companies, or are subsidiaries of bank holding companies.
D)do business in more than one location within a particular state.

Question 20

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

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

Question 21

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 22

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

A)Money
B)Bond
C)Options
D)Swap

Question 23

Business finance companies focus on loans to very large businesses.

Question 24

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

Question 25

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 26

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

Question 27

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 28

Finance companies are most likely to compete with which of the following institutions for consumer loans?

A)commercial banks
B)securities firms
C)pension funds
D)insurance companies
E)none of the above

Question 29

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

Question 30

Finance companies can probably not build their capital base by

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

Question 31

The greatest risk for finance companies is ____ risk.

A)settlement
B)interest rate
C)credit
D)exchange rate
E)none of the above

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 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 34

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

Question 35

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 36

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

Question 37

Finance companies primarily invest in

A)consumer loans.
B)real estate loans.
C)business loans.
D)none of the above

Question 38

Consumer finance companies sometimes provide personal loans directly to individuals.