Deck 22: Finance Company Operations

Question 1

Unlike loans made by commercial banks, loans made by finance companies cannot be securitized (bundled together and sold as securities to investors).

Answer 1

False

Question 2

When a finance company purchases a firm's receivables at a discount and becomes responsible for processing and collecting the balances of these accounts, it acts as a

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

Answer 2

D

Question 3

Business finance companies focus on loans to very large businesses.

Answer 3

False

Question 4

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 5

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

Question 6

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 theseaccounts.

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

Question 7

Finance companies are exempt from state regulations.

Question 8

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

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

Question 9

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

A) bank loans
B) commercial paper issues
C) bonds
D) borrowing from the Federal Reserve

Question 10

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 11

Consumer finance companies sometimes provide mortgage loans to individuals.

Question 12

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

Question 13

The ________ is the federal agency responsible for regulating consumer finance products and services that may be offered by finance companies.

A) Consumer Financial Safety Commission
B) Securities and Exchange Commission
C) Consumer Financial Protection Bureau
D) Federal Trade Commission

Question 14

Finance companies are subject to

A) disclosure requirements and truth in lending rules.
B) ceiling interest rates on loans provided.
C) a maximum length on loan maturity.
D) regulations on intrastate business.
E) all of the above

Question 15

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

A) are relatively low and are expected to increase.
B) have increased.
C) have been stable for several years.
D) are projected to decrease.

Question 16

A finance company's cash flows are _____ related to changes in economic growth and may be ____ related to changes in the risk-free rate.

A) positively; inversely
B) inversely; positively
C) inversely; inversely
D) positively; positively

Question 17

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

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

Question 18

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

Question 19

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

A) do not rely heavily on deposits as a source of funds.
B) focus on financing acquisitions by companies.
C) focus on providing residential mortgages.
D) use most of their funds to purchase stocks

Question 20

If finance companies have liabilities that are more rate sensitive than their assets and want 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 21

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

Question 22

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

Question 23

The most important risk for finance companies is ____ risk.

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

Consumer finance companies primarily focus on

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

Question 29

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.