Chapter 22—Finance Company Operations
1. ____ finance companies concentrate on purchasing credit contracts from retailers and dealers.
a.
Consumer
b.
Sales
c.
Commercial
d.
None of the above
2. 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
3. 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
4. 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.
5. Which of the following is not a main source of funds for finance companies?
a.
bank loans
b.
commercial paper issues
c.
bonds
d.
capital
6. 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
7. 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
8. 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.
9. 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.
commercial banks and savings and institutions.
d.
mutual funds.
10. 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.
11. 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 banker’s acceptance.
d.
a letter of credit.
12. Finance companies are exempt from state regulations.
a. True
b. False
13. Finance companies are not subject to state regulations on intrastate business.
a. True
b. False
14. 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
15. 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.
16. Overall, the liquidity risk of finance companies is higher than that of other financial institutions.
a. True
b. False
17. 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
18. 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.
19. 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.
20. ____ 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
21. 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.
22. 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
23. Most finance companies are commonly exposed to all forms of risk below except ____ risk.
a.
exchange rate
b.
interest rate
c.
liquidity
d.
credit
24. 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
25. Finance companies participate in the ____ market to reduce interest rate risk.
a.
money
b.
bond
c.
options
d.
swap
26. Many consumer finance companies also provide personal loans, directly to individuals to finance
purchases of large household items.
a. True
b. False
27. Business finance companies focus on loans to very large businesses.
a. True
b. False
28. Consumer finance companies sometimes provide Business finance companies to individuals.
a. True
b. False
29. 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.
a. True
b. False
30. 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.
a. True
b. False
31. Some finance companies offer credit card loans through a particular retailer.
a. True
b. False
32. The main competition for finance companies in the consumer loan market comes from pension funds
and insurance companies.
a. True
b. False
33. The value of a finance company can be modeled as the present value of its future cash flows.
a. True
b. False
34. The most important risk for finance companies is ____ risk.
a.
settlement
b.
accounting
c.
credit
d.
exchange rate
35. 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.
36. Consumer finance companies primarily focus on for
a.
consumer loans.
b.
consumer advising.
c.
consumer regulation.
d.
none of the above
37. Finance companies are regulated by the states but are not subject to regulation by an agency of the
federal government.
a. True
b. False
38. Historically, captive finance subsidiaries were associated with:
a.
the automobile industry.
b.
the oil and gas industry.
c.
the textile industry.
d.
department stores.