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.

Accepted Answer

When finance companies purchase a firm's receivables at a discount and take responsibility for processing and collecting the balances of these accounts, they act as factors. Factors provide a way for firms to convert their accounts receivable into immediate cash flow, without having to wait for customers to make payments.

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

Accepted Answer

Commercial finance companies provide loans to firms that cannot obtain financing from commercial banks. Consumer finance companies specialize in providing loans and financing to individuals, while sales finance companies help consumers purchase goods by providing financing for installment payments.

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.

Accepted Answer

A

Question 4

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

Accepted Answer

The answer of Overall, the liquidity risk of finance companies...

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.

Accepted Answer

Captives can be used to finance products leased to others, so statement D is incorrect.

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

Accepted Answer

Finance companies typically have a higher loan delinquency rate compared to other lending financial institutions such as banks and credit unions. This is because they typically lend to individuals with lower credit scores and higher risk. Additionally, finance companies tend to charge higher interest rates on loans compared to other lenders, hence the average rate charged on loans is higher on average.

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

Accepted Answer

The answer of Finance companies are subject to
A)a maximum limit...

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

Accepted Answer

If finance companies were confident about projections of rising interest rates, they may consider using funds obtained from issuing bonds to offer loans with variable rates. This is because variable rates adjust to changes in the market interest rates, allowing the finance companies to potentially earn more interest if rates rise. On the other hand, if they offered fixed rates, they might end up paying more on their borrowing than they are earning on their lending if rates rise.

Question 9

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

Accepted Answer

Finance companies are subject to state regulations on intrastate business. In fact, they are also subject to federal regulations. These regulations are in place to protect consumers and ensure fair practices within the industry.

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

Accepted Answer

The answer of Finance companies are more likely to issue...

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

Accepted Answer

The answer of When a finance company's assets are ____...

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.

Accepted Answer

Finance companies typically rely on sources other than deposits, such as commercial paper, bonds, and loans from other financial institutions, to obtain funds for lending activities. Commercial banks, savings institutions, and credit unions, on the other hand, primarily obtain funds from deposits.

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.

Accepted Answer

A wholly owned subsidiary that specializes in providing financing options for the parent company's products and services is called a captive finance subsidiary. It helps the parent company increase sales by providing financial flexibility to customers and distributors. The other options such as a factor, leasing agent, or captive factoring agent do not fully capture the range of services provided by a captive finance subsidiary.

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

Accepted Answer

Federal funds are not a source of finance company funds. Federal funds are overnight loans of reserve balances held at the Federal Reserve. They are used by banks to meet reserve requirements and to maintain liquidity.

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.

Accepted Answer

When a finance company purchases equipment for use by another business, it typically provides financing in the form of a leasing agreement. Factoring typically involves purchasing accounts receivable, while bankers acceptances and letters of credit are typically used for international trade transactions.

Question 16

____ finance companies concentrate on purchasing credit contracts from retailers and dealers.
A)Consumer
B)Sales
C)Commercial
D)None of the above

Accepted Answer

Consumer finance companies specialize in providing loans and financing to individual consumers for purchases such as cars, appliances, or furniture. They often purchase credit contracts from retailers or dealers to provide financing options for their customers. Sales finance companies, on the other hand, provide financing directly to the retailer or dealer. Commercial finance companies focus on providing financing for businesses. Therefore, option A is the best choice for this question as it directly mentions the purchase of credit contracts from retailers and dealers, which is a typical activity of consumer finance companies.

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.

Accepted Answer

Finance companies prefer to increase their long-term debt when interest rates have declined as it allows them to borrow money at a lower cost, which can increase profitability.

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.

Accepted Answer

Credit unions and commercial banks are both major players in the consumer loan market and offer similar financial products and services as finance companies. Pension funds, life insurance companies, property and casualty insurance companies, savings and loan associations, and savings banks may also offer consumer loans, but they are not as direct of competitors in this market as 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.

Accepted Answer

Finance companies that act as bank holding companies, or are subsidiaries of bank holding companies, are federally regulated under the Bank Holding Company Act. This act gives the Federal Reserve regulatory authority over these companies to ensure their safety and soundness. Independently owned finance companies may be subject to state regulation, but not necessarily federal regulation. Being a subsidiary of a savings institution or doing business in more than one location within a particular state does not automatically make a finance company federally regulated.

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

Accepted Answer

Deposits are a main source of funds for banks, but not for finance companies. Finance companies typically rely on bank loans, commercial paper issues, and bonds to fund their lending activities.

Quiz 22: Finance Operations

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

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

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

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

Which of the following statements is incorrect?

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

Finance companies are subject to

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.

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

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 .

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.

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

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

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

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

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

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

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

Finance companies are federally regulated when they

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