6 - Chapter Six The Financial Services Industry Finance...

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Chapter Six The Financial Services Industry: Finance Companies Chapter Outline Introduction Size, Structure, and Competition of the Industry Balance Sheet and Recent Trends Consumer Loans Mortgages Business Loans Industry Performance Regulation Global Issues Summary 47
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Solutions for End-of-Chapter Questions and Problems: Chapter Six 1. What is the primary function of finance companies? How do finance companies differ from commercial banks? The primary function of finance companies is to make loans to individuals and corporations. Finance companies do not accept deposits, but borrow short- and long-term debt, such as commercial paper and bonds, to finance the loans. The heavy reliance on borrowed money has caused finance companies to hold more equity than banks for the purpose of signaling solvency to potential creditors. Finally, finance companies are less regulated than commercial banks, in part because they do not rely on deposits as a source of funds. 2. What are the three major types of finance companies? To which market segments do these companies provide service? The three types of finance companies are (1) sales finance institutions, (2) personal credit institutions, and (3) business credit institutions. Sales finance companies specialize in making loans to customers of a particular retailer or manufacturer. An example is General Motors Acceptance Corporation. Personal credit institutions specialize in making installment loans to consumers. Business credit institutions provide specialty financing, such as equipment leasing and factoring, to corporations. Factoring involves the purchasing of accounts receivable at a discount from corporate customers and assuming the responsibility of collection.
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