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Indicate whether the statement is true or false.
1. Consumer finance companies sometimes provide mortgage loans to individuals.
a. True
b. False
2. Finance companies are exempt from state regulations.
a. True
b. False
3. Many consumer finance companies provide personal loans directly to individuals to finance purchases of large
household items.
a. True
b. False
4. Finance companies are not subject to state regulations on intrastate business.
a. True
b. False
5. The value of a finance company can be modeled as the present value of its future cash flows.
a. True
b. False
6. Business finance companies focus on loans to very large businesses.
a. True
b. False
7. 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
8. Overall, the liquidity risk of finance companies is higher than that of other financial institutions.
a. True
b. False
9. Finance companies are regulated by the states and are not subject to regulation by any agency of the federal
government.
a. True
b. False
10. The main competition for finance companies in the consumer loan market comes from pension funds and insurance
companies.
a. True
b. False
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11. Some finance companies offer credit card loans through a particular retailer.
a. True
b. False
12. 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.
a. True
b. False
13. Unlike loans made by commercial banks, loans made by finance companies cannot be securitized (bundled together
and sold as securities to investors).
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
14. 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 these are correct.
15. The most important risk for finance companies is ____ risk.
a. settlement
b. accounting
c. credit
d. exchange rate
16. 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.
17. 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.
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18. 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.
19. 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.
20. 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
21. 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 these.
22. 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
23. 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
24. Finance companies participate in the ____ market to reduce interest rate risk.
a. money
b. bond
c. options
d. swap
25. Finance companies are subject to
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a. disclosure requirements and truth in lending rules.
b. minimum specified interest rates on loans provided.
c. a minimum length on loan maturity.
d. regulations that require finance companies to only operate in one state.
26. 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.
27. 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
28. ____ finance companies provide financing for customers of retail stores and provide personal loans to individuals.
a. Consumer
b. Sales
c. Commercial
d. None of these are correct.
29. Consumer finance companies primarily focus on
a. consumer loans.
b. consumer advising.
c. consumer regulation.
d. None of these are correct.
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Answer Key
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chapter 22