460 Chapter 22 Finance Operations Chapter 22 Finance Operations 1 finance companies concentrate on purchasing credit contracts from retailers and dealers A Consumer B Sales C Commercial D None of these ANSWER B 2 Which of the following is not a source of finance company funds to support operations A loans from banks B commercial paper C federal funds D bonds ANSWER C 3 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 A less increase B less decrease C more increase D more decrease ANSWER A 4 Finance companies differ from commercial banks savings institutions and credit unions in that they A normally do not obtain funds from deposits B focus on financing acquisitions by companies C focus on providing residential mortgages D use most of their funds to purchase stocks ANSWER A 5 Which of the following is not a main source of funds for finance companies A bank loans B commercial paper issues C bonds D deposits ANSWER D 461 Chapter 22 Finance Operations 6 Finance companies are more likely to issue bonds when their assets are presently interest ratesensitive than their liabilities and when interest rates are expected to A more decrease B less increase C more increase D less decrease ANSWER B 7 Finance companies would prefer to increase their long term debt most once interest rates A have declined B have increased C were stable for several years D were projected to decline ANSWER A 8 The main competition for finance companies in the consumer loan market comes from A pension funds B life insurance companies and property and casualty insurance companies C savings and loan associations D savings banks E credit unions and commercial banks ANSWER E 9 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 A leasing agent B lessor C lessee D factor ANSWER D 10 When a finance company purchases equipment for use by another business the finance company provides financing in the form of A factoring B leasing C a bankers acceptance D a letter of credit ANSWER B Chapter 22 Finance Operations 462 11 Finance companies are federally regulated when they A are independently owned B are a subsidiary of a savings institution C act as bank holding companies or are subsidiaries of bank holding companies D do business in more than one location within a particular state ANSWER C 12 Finance companies are subject to A a maximum limit on loan size B ceiling interest rates on loans provided C a maximum length on loan maturity D regulations on intrastate banking E all of these ANSWER B 13 If finance companies with a greater rate sensitivity of liabilities than assets wanted to reduce interest rate risk they could A shorten their average asset life B lengthen their average asset life C shorten the maturity of debt that they issue D make greater use of fixed rate loans ANSWER A 14 Compared to other lending financial institutions finance companies have a loan delinquency rate and the average rate charged on loans is on average A lower lower B lower higher C higher higher D higher lower ANSWER C 15 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 A captive finance subsidiary B factor C leasing agent D captive factoring agent ANSWER A 463 Chapter 22 Finance Operations 16 Which of the following statements is incorrect A A captive finance subsidiary s purpose is to finance sales of the parent company s products and services B An operating agreement between the parent and the captive specifies the type of receivables that qualify for same and specific services provided by the parent C A captive can be used to finance distributor or dealer inventories until a sale occurs D A captive is rarely used to finance products leased to others ANSWER D 17 provide loans to firms that cannot obtain financing from commercial banks A Consumer finance companies B Sales finance companies C Commercial finance companies D None of these ANSWER C 18 Which of the following is not a use of finance company funds A consumer loans B business loans C commercial paper D real estate loans E All of these are uses of finance company funds ANSWER C 19 Finance companies commonly act as for accounts receivable that is they purchase a firm s receivables at a discount and are responsible for processing and collecting the balances of these accounts A brokers B dealers C factors D none of these ANSWER C 20 Most finance companies are commonly exposed to all of the following forms of risk except A exchange rate risk B interest rate risk C liquidity risk D credit risk ANSWER A Chapter 22 Finance Operations 464 21 Changes in economic growth are related to a finance company s cash flows and changes in the risk free rate are related to a finance company s cash flows A positively negatively B negatively positively C negatively negatively D positively positively ANSWER A 22 Finance companies participate in the market to reduce interest rate risk A money B bond C options D swap ANSWER D 23 Finance companies are not subject to state regulations on intrastate business A true B false ANSWER B 24 Overall the liquidity risk of finance companies is higher than that of other financial institutions A true B false ANSWER B 25 Many consumer finance companies also provide personal loans directly to individuals to finance purchases of large household items A true B false ANSWER A 26 Business finance companies primarily focus on loans to very large businesses A true B false ANSWER B