10. Risk Explain why many savings institutions experience financial problems at
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Question
10. Risk Explain why many savings institutions experience financial problems at the same time.
1. Exposure to Interest Rate Risk Is the cost of funds obtained by finance companies very sensitive to market interest rate movements? Explain.
2. Issuance of Commercial Paper How are small and medium-sized finance companies able to issue commercial paper? Why do some well-known finance companies directly place their commercial paper?
3. Finance Company Affiliations Explain why some finance companies are associated with automobile manufacturers. Why do some of these finance companies offer below-market rates on loans?
4. Uses of Funds Describe the major uses of funds by finance companies.
7. Regulation of Finance Companies Describe the kinds of regulations that are imposed on finance companies.
8. Liquidity Position Explain how the liquidity position of finance companies differs from that of depository institutions such as commercial banks.
9. Exposure to Interest Rate Risk Explain how the interest rate risk of finance companies differs from that of savings institutions.
10. Exposure to Credit Risk Explain how the default risk of finance companies differs from that of other lending financial institutions.
Explanation / Answer
Ans 1.
Finance companies operation is all about sourcing of funds from the market and lending to borrowers earning a spread in the process . The main element of cost of capital as well the main income source is the spread between borrowing and lending.Hence financing companies are very sensitve to change in the market rate of interest.
Ans 2
Small and medium companise are able to issue CP's which are secured . Earlier CP's were issued unsecured making it difficult for Small and medium players to place it,Well know financial companies place CP's directly to avoid the transaction cost such as brokerage to lower the cost of funds.
Ans 3
Automobile manufactures often form affiliates to provide finance to the buyer to purchase their product to increase the sales, The main objective is it to promote the sale of automobiles which are costlier items for which financing would act as an incentive to buy.
Ans 4
Major uses of fund by the finance companies to lend it to following segments
1. Automobile Loans
2. Personnal Loans
3. Working capital Loan
4.Loan for capital investmet such as investment in new business, aquisition of new businsess, start ups Etc.
5.Housing Loans.
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