Chapter 03 – Financial Services: Finance Companies
3-1
Education.
Solutions for End-of-Chapter Questions and Problems: Chapter Three
1. What is the primary function of finance companies? How do finance companies differ from
depository institutions?
2. What are the three major types of finance companies? To which market segments do each
of these types of companies provide service?
The three types of finance companies are (1) sales finance institutions, (2) personal credit
3. What have been the major changes in the accounts receivable balances of finance
companies over the 35-year period from 1977 to 2012?
4. What are the major types of consumer loans? Why are the rates charged by consumer
finance companies typically higher than those charged by commercial banks?
5. Why have home equity loans become popular? What are securitized mortgage assets?
Since the enactment of the Tax Reform Act of 1986 only loans secured by an individual’s home
Chapter 03 – Financial Services: Finance Companies
3-2
6. What advantages do finance companies have over commercial banks in offering services to
small business customers? What are the major subcategories of business loans? Which
category is largest?
7. What have been the primary sources of financing for finance companies?
Finance companies have relied primarily on short-term commercial paper and long-term notes
8. How do finance companies make money? What risks does this process entail? How do
these risks differ for a finance company versus a commercial bank?
Finance companies make a profit by borrowing money at a rate lower than the rate at which they
Chapter 03 – Financial Services: Finance Companies
3-3
Education.
9. Compare Tables 3-1 and 2-6. Which firms have higher ratios of capital to total assets:
finance companies or commercial? What does this comparison indicate about the relative
strengths of these two types of firms?
Table 3-1 indicates that finance companies had a ratio of capital to total assets of 14.3 percent in
2012. Commercial banks (Table 2-6) have 11.5 percent of total capital to total assets. The
10. Why do finance companies face less regulation than do commercial banks? How does this
advantage translate into performance advantages? What is the major performance
disadvantage?