Question 1

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

Accepted Answer

Capital is not a main source of funds for finance companies. Finance companies typically rely on deposits, bank loans, commercial paper, and bonds to generate funds for their lending activities. Capital may be used to support the company's operations and provide a cushion for potential losses, but it is not a primary funding source.

Question 2

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

Accepted Answer

When a finance company purchases equipment for use by another business, the finance company provides financing in the form of leasing. Factoring involves the sale of receivables, a banker's acceptance is a payment instrument used in international trade, and a letter of credit is a guarantee of payment issued by a bank.

Question 3

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.

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 4

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.

Accepted Answer

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

Question 5

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

Accepted Answer

Commercial banks and savings institutions are direct competitors for finance companies in the consumer loan market as they also offer similar loan products and services to consumers. Pension funds and mutual funds typically focus on investing in securities rather than providing loans to individuals, while life insurance and property and casualty insurance companies may offer loans as a part of their business but it is not their primary focus.

Question 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 ____.

Accepted Answer

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

Question 7

Finance companies are exempt from state regulations.

Accepted Answer

Finance companies are subject to state regulations, just like any other business operating within a state. This includes regulations related to licensing, consumer protection, and interest rates.

Question 8

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

Accepted Answer

Finance companies are subject to state regulations on intrastate business, as they operate within a state and are subject to the laws and regulations of that state.

Question 9

Which of the following statements is incorrect?

Accepted Answer

Captive finance subsidiaries are often used to finance products leased to others, so statement D is incorrect. Captives can finance a variety of products and services, including distributor or dealer inventories before a sale occurs, as stated in statement C. Statement A is also true, as it describes the primary purpose of a captive finance subsidiary, and statement B accurately describes the operating agreement between the parent and the captive.

Question 10

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

Accepted Answer

Federal funds are not a source of finance for company funds to support operations. Federal funds refer to short-term loans made between banks to meet reserve requirements or facilitate overnight borrowing needs; they are not available for external companies to finance their operations. The other options (A, B, and D) are all common sources of finance for companies, such as borrowing from banks, issuing commercial paper, and selling bonds.

Question 11

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

Accepted Answer

Finance companies typically do not obtain funds from deposits like commercial banks, savings institutions, and credit unions. Instead, they raise funds through issuing securities or borrowing from banks or other financial institutions.

Question 12

Finance companies are subject to

Accepted Answer

The answer of Finance companies are subject to
...

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

Accepted Answer

A captive finance subsidiary is a subsidiary company wholly owned by the parent company and its primary purpose is to provide financing for the 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.

Question 14

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

Accepted Answer

Finance companies that purchase a firm's receivables at a discount and are responsible for processing and collecting the balances of these accounts act as a factor. Factors provide financing to companies by purchasing their accounts receivable at a discount, which allows businesses to receive cash quickly rather than waiting for customers to pay their outstanding invoices. Factors then manage collections on the accounts and retain a percentage of the value of the accounts receivable as their fee for providing the financing.

Question 15

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

Accepted Answer

The answer of If finance companies with a greater rate-sensitivity...

Question 16

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

Accepted Answer

Commercial finance companies provide loans to businesses that are unable to secure financing from commercial banks. Consumer finance companies lend to individuals for personal expenses, while sales finance companies specialize in financing consumer purchases of specific products.

Question 17

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

Accepted Answer

Finance companies typically have higher loan delinquency rates and higher interest rates compared to other lending financial institutions. This may be due to the fact that finance companies cater to higher-risk borrowers who may not qualify for loans from traditional banks and institutions. As a result, finance companies charge higher interest rates to offset the higher risks associated with their customer base.

Question 18

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 19

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

Accepted Answer

When interest rates have declined, it becomes more attractive to issue long-term debt as the cost of borrowing decreases. This allows finance companies to lock in lower rates for a longer period, which reduces their risk and can improve their profitability.

Question 20

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

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.

Quiz 22: Finance Company Operations