Chap006 - Chapter 06 - Financial Services: Finance...

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Chapter 06 - Financial Services: Finance Companies Chapter Six Financial Services: Finance Companies Chapter Outline Introduction Size, Structure, and Composition of the Industry Balance Sheet and Recent Trends Assets Liabilities and Equity Industry Performance Regulation Global Issues Summary 6-1
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Chapter 06 - Financial Services: Finance Companies Solutions for End-of-Chapter Questions and Problems 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 generally hold more equity than commercial 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. 3.
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This note was uploaded on 05/26/2011 for the course FIN 5530 taught by Professor Lee during the Three '11 term at University of New South Wales.

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Chap006 - Chapter 06 - Financial Services: Finance...

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