978-0133427073 Test Bank Chapter 27

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Financial Markets and Institutions, 8e (Mishkin)

1) 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

2) 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.

3) 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.

4) By the beginning of 2013, banks held $1,191 billion in consumer loans. Finance companies

held about ________ of that figure.

A) 42%

B) 68%

C) 90%

D) 117%

5) Finance companies are ________ market intermediaries.

A) stock

B) bond

C) FX

D) money

6) 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.

7) 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.

8) 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.

9) 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.

10) In 2013, the largest portion of loans made by finance companies was ________, representing

60% of the loans.

A) consumer loans

B) factoring loans

C) business loans

D) real estate

11) 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.

12) In which industry is factoring a common practice?

A) Automobile

B) Tech services

C) Entertainment

D) Apparel

13) In which industry is factoring a common practice?

A) Automobile

B) Tech services

C) Entertainment

D) Apparel

14) 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.

15) In which industry is a floor plan common practice?

A) Automobile

B) Tech services

C) Entertainment

D) Apparel

16) 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.

17) 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.

18) 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.

19) 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.

20) 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%

21) 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%

22) 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.

27.2 True/False

1) Installment credit is a loan that requires the borrower to make a series of equal payments over

some fixed length of time.

2) A balloon loan requires periodic payments of principle and interest.

3) Many retailers established finance companies to provide financing for their customers.

Although these finance subsidiaries did increase sales, the subsidiary was typically unprofitable.

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

5) Finance companies face much stricter regulations than commercial banks.

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

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

8) Factoring refers to purchasing a firm’s accounts receivables at a premium.

9) In a lease financing arrangement, a finance company will purchase equipment, which it then

leases to a company for a set period.

10) Consumer finance companies make loans to borrowers who would not qualify for bank loans

due to low income or poor credit.

11) A sales finance company differs from a captive finance company primarily in regulations and

other restrictions.

12) Usury statutes limit the level of interest rates that finance companies can charge their

customers.

13) Like the consumer finance market, finance companies face many regulations in the business

loan market.

1) What factors explain the existence of finance companies, given that banks already provide

loans, credit, and so forth?

Topic: Chapter 27.2 Purpose of Finance Companies

Question Status: New Question

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

Topic: Chapter 27.5 Regulation in Finance Companies

Question Status: New Question

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

Topic: Chapter 27.3 Risk in Finance Companies

Question Status: New Question

4) What are the various types of finance companies?

Topic: Chapter 27.4 Types of Finance Companies

Question Status: New Question

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

Topic: Chapter 27.4 Types of Finance Companies

Question Status: New Question

6) Describe how floor plans work in the automobile industry. Why can finance companies offer

these arrangements at a lower cost than banks?

Topic: Chapter 27.4 Types of Finance Companies

Question Status: New Question