Financial Markets and Institutions: Abridged 10 Edition
Financial Markets and Institutions: Abridged 10 Edition
Financial Markets and Institutions: Abridged 10 Edition
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Sources of Funds
Loans from Banks - Finance companies borrow from
commercial banks and can renew the loans over time.
Commercial Paper - Finance companies continually roll
over their issues to create a permanent source of funds.
Deposits - Some states allow finance companies to
attract funds by offering customer deposits.
Bonds - Finance companies in need of long-term funds
can issue bonds.
Capital - Finance companies can build their capital base
by retaining earnings or by issuing stock.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
V f (E(CF), k)
Economic Growth
Can enhance a finance companys cash flows by increasing
household demand for consumer loans, thereby allowing the
finance company to provide more loans.
Change in the Risk-Free Interest Rates
Cash flows may be inversely related to interest rate
movements.
Finance companies rely heavily on short-term funds
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
f(Rf
,RP)
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
SUMMARY
Finance companies are classified by type. A consumer
finance company provides financing for customers of
retail stores or wholesalers, while a business finance
company offers loans to small businesses. A captive
finance subsidiary (CFS) is a wholly owned subsidiary
whose primary purpose is to finance sales of the parent
companys products and services, provide wholesale
financing to distributors of the parent companys
products, and purchase receivables of the parent
company.
The main sources of finance company funds are loans
from banks, sales of commercial paper, bonds, and
capital. The main uses of finance company funds are
consumer loans, business loans, leasing, and real estate
loans.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
SUMMARY (Cont.)
Finance companies are exposed to credit risk as a result
of their consumer loans, business loans, and real estate
loans. They are also exposed to liquidity risk because
their assets are not very marketable in the secondary
market. They may also be exposed to interest rate risk.
Finance companies are valued as the present value of
their expected cash flows. Their valuation is highly
dependent on economic conditions because there are
more requests for loans by qualified borrowers when
economic conditions are favorable. In addition, the
amount of loan defaults is normally lower when the
economy is strong.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
SUMMARY (Cont.)
Finance companies compete with depository institutions
(such as commercial banks, savings institutions, and
credit unions) that provide loans to consumers and
businesses. Many finance companies have insurance
subsidiaries that compete directly with other insurance
subsidiaries.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.