Deck 26: Finance Companies

Question 1

As presented in the Consolidated Finance Company Balance Sheet, the largest asset of finance companies is consumer loans, representing ________ of assets.

A)10%
B)22%
C)25%
D)33%

Answer 1

33%

Question 2

How do consumer loans differ between those issued by finance companies and those issued by banks?

A)Loans made by finance companies are often riskier than those issued by banks.
B)Consumer finance companies are typically owned by the manufacturer whose products are being financed.
C)Both A and B of the above are correct.
D)None of the above are correct.

Answer 2

Both A and B of the above are correct.

Question 3

Finance companies are ________ market intermediaries.

A)stock
B)bond
C)FX
D)money

Answer 3

money

Question 4

Sales finance companies make loans to consumers to purchase items

A)on the Internet.
B)from any retailer.
C)from a particular retailer.
D)for a specific use.

Question 5

What is default risk?

A)A problem that arises when a firm runs short of cash.
B)The risk of asset prices rising too high.
C)The chance that the borrower will fail to repay a loan.
D)The risk associated with longer-term contracts.

Question 6

By the beginning of 2010, banks held $1,177 billion in consumer loans. Finance companies held about ________ of that figure.

A)40%
B)60%
C)90%
D)110%

Question 7

In 2010, the largest portion of loans made by finance companies was ________, representing 43.3% of the loans.

A)consumer loans
B)factoring loans
C)business loans
D)real estate

Question 8

In factoring, a finance company makes a loan and

A)purchases the firm's accounts receivables at a premium.
B)purchases the firm's accounts payables at a premium.
C)purchases the firm's accounts receivables at a discount.
D)purchases the firm's accounts payables at a discount.

Question 9

A balloon loan requires

A)multiple payments at odd, random intervals.
B)periodic payments of principle and interest.
C)a single large payment at the loan's maturity to retire the debt.
D)a steadily increasing payment (floating balloon)to retire the debt.

Question 10

Two growth areas for consumer finance companies are

A)first mortgages and vacation financing.
B)marine vessel loans and auto loans.
C)home equity loans and educational loans.
D)home equity loans and "private label" retail credit cards.

Question 11

In which industry is a floor plan common practice?

A)automobile
B)tech services
C)entertainment
D)apparel

Question 12

Although finance companies are largely unregulated, they do face some regulations aimed primarily at

A)protecting unsophisticated customers.
B)the government deposit insurance.
C)large corporate customers.
D)protecting the finance companies from failure.

Question 13

The earliest examples of finance companies date back to the beginning of the ________ when retailers offered installment credit to customers.

A)1800s
B)1900s
C)1950s
D)1980s

Question 14

What are the three main types of finance companies?

A)sales, lease, and buyback
B)business, sales, and consumer
C)factor, lease, and floor plan
D)None of the above are correct.

Question 15

What is liquidity risk?

A)A problem that arises when a firm runs short of cash.
B)The risk of asset prices rising too high.
C)The chance that the borrower will fail to repay a loan.
D)The risk associated with longer-term contracts.

Question 16

In the early 1900s, banks did not offer loans to purchase automobiles. This is because

A)banks could not make a profit on car loans.
B)only finance companies were permitted to offer car loans.
C)banks could not repossess a car if the loan defaulted.
D)banks did not view a car as a productive asset.

Question 17

Which of the following is not an advantage of a lease financing arrangement?

A)Companies with losses can still depreciate equipment if leased from a finance company.
B)Repossession is easier in a lease-finance arrangement because the finance company already owns the equipment.
C)Finance companies are in a good position to sell a repossessed asset, especially if they are a subsidiary of the equipment manufacturer.
D)The lessee often does not have to make as large of an upfront payment, relative to a straight loan.

Question 18

Consumer finance companies typically make loans to consumers who

A)prefer to avoid the regulatory environment at a bank.
B)cannot obtain credit otherwise due to low income or poor credit.
C)Both A and B of the above are correct.
D)Neither A nor B of the above are correct.

Question 19

In which industry is factoring a common practice?

A)automobile
B)tech services
C)entertainment
D)apparel

Question 20

In which industry is factoring a common practice?

A)automobile
B)tech services
C)entertainment
D)apparel

Question 21

Factoring refers to purchasing a firm's accounts receivables at a premium.

Question 22

Many retailers established finance companies to provide financing for their customers. Although these finance subsidiaries did increase sales, the subsidiary was typically unprofitable.

Question 23

Consumer finance companies make loans to borrowers who would not qualify for bank loans due to low income or poor credit.

Question 24

Describe the process of factoring? When and why is it used?

Question 25

Lease financing is an example of a business financing need not served by most banks.

Question 26

Discuss the regulatory environment for finance companies relative to commercial banks.

Question 27

Finance companies face much stricter regulations than commercial banks.

Question 28

A sales finance company differs from a captive finance company primarily in regulations and other restrictions.

Question 29

Commercial paper is an important source of funding for finance companies. As presented in the Consolidated Finance Company Balance Sheet, commercial paper represents about ________ of their liabilities.

A)3.9%
B)5.8%
C)12.5%
D)20.0%

Question 30

What are the various types of finance companies?

Question 31

On average, finance companies have a capital-to-total-asset ratio that is ________ than that of banks and savings and loans.

A)lower
B)the same as
C)higher
D)None of the above are correct. Finance companies do not have a capital-to-total-asset ratio.

Question 32

Installment credit is a loan that requires the borrower to make a series of equal payments over some fixed length of time.

Question 33

Much like banking institutions, interest-rate risk is a big concern for finance companies.

Question 34

Finance companies essentially sell commercial paper and use the proceeds to make loans.

Question 35

Usury statutes limit the level of interest rates that finance companies can charge their customers.

Question 36

Discuss the types of risk faced by finance companies. Are these risks similar to banks?

Question 37

Like the consumer finance market, finance companies face many regulations in the business loan market.

Question 38

What factors explain the existence of finance companies, given that banks already provide loans, credit, and so forth?

Question 39

In a lease financing arrangement, a finance company will purchase equipment, which it then leases to a company for a set period.

Question 40

A balloon loan requires periodic payments of principle and interest.

Question 41

Describe how floor plans work in the automobile industry. Why can finance companies offer these arrangements at a lower cost than banks?