Q&A Hero

Q: The Financial Services Modernization Act of 1999 allowed investment banks and securities firms to offer deposit accounts to individuals.

Q: Cash management accounts were an early attempt by commercial banks to provide investment banking services to individuals.

Q: Electronic brokerage allows an investor to have direct access to the trading floor.

Q: In pure arbitrage, a trader would sell an asset in one market at one price while buying the same asset in another market at a higher price.

Q: The change to decimalization of stock market transactions has lead to an increase in income from the market making activity of investment banks and securities firms.

Q: Decimalization involves making quotes in the equities markets in units of 1 cent ($0.01) rather than in units of one-eights of a dollar ($0.125).

Q: Principal transactions allow the market maker to always make a profit regardless of whether the market price for a specific stock is rising or falling.

Q: Agency transactions of market makers are two-way transactions on behalf of customers

Q: Market makers in an NYSE stock are obligated to buy shares from sellers even when the market for the stock is declining.

Q: Market making involves creating a primary market in a financial asset.

Q: In order to realize a return on their investment, venture capital firms sell their equity interest in the company.

Q: An angel venture capitalist is likely to be a wealthy individual that makes equity investments in unsuccessful, bankrupt firms.

Q: As compared to venture capital firms, private equity firms specialize in assisting existing companies that have proven themselves in their industry.

Q: Venture capital firms often make loans to finance new and often high-risk companies that may have no business history.

Q: When conducting a firm commitment offering, the investment bank is acting as an agent on behalf of the issuing company or government.

Q: A best-efforts offering of a security is more risky for an investment bank than a firm commitment offering.

Q: In order for an investment bank to perform a firm commitment offering of securities, they must maintain at least 20% equity on their balance sheet.

Q: Initial public offerings (IPOs) are first-time issues of firms whose equity has not previously traded in an organized market.

Q: The top ten underwriters of global debt and equity issues represent over 80 percent of the industry total.

Q: In a public offering of a new security, an investment banker places a new issue of securities with a handful of private, usually large, investors.

Q: Because the business of funds management generates fees based on the size of the pool of assets managed, the flow of income is more volatile than either investment banking function or the trading function.

Q: The objective of the investment function of securities firms (funds management) is to allocate assets so that they outperform relative risk-return performance benchmark.

Q: National full-line investment banks and securities firms provide business services to both retail and corporate customers.

Q: As of 2012, there were over 4,900 securities firms in operation.

Q: As of the first half of 2009, income generated by securities brokerage accounted for over 65% of commercial bank holding company fee income.

Q: The value of assets is the traditional measure of size in the securities brokerage and investment banking industry.

Q: As of October 1987, there were over 9,500 securities firms and investment banks.

Q: The number of investment banks and securities firms expanded rapidly from 1980 to October 1987.

Q: The Financial Services Modernization Act of 1999 and other regulatory changes have been the cause of the increase in interindustry mergers of investment banks and securities firms.

Q: Securities underwriting and trading is an activity that requires a considerable investment in long-term assets and relatively small investments in short-term assets.

Q: The concentration of business among the largest firms in the securities firm/investment banking business has increased significantly since the stock market crash of 1987.

Q: Securities trading and underwriting is a profit generating activity that requires FIs to hold an inventory of securities they trade.

Q: Investment banks engage in activities such as advising on mergers, acquisitions, and corporate restructuring.

Q: Investment banks specialize in the origination, underwriting, and distribution of new securities issued by corporations or governments.

Q: Sales finance companies do not directly compete with depository institutions for consumer loans.

Q: As the economic expansion continued through the 1990s, the demand for finance company loans increased.

Q: As of March 2012, the payday loan industry was regulated at the federal level.

Q: As a percent of assets, finance companies currently rely more heavily on commercial paper as a source of financing than in 1977.

Q: Finance companies have relied primarily on short-term commercial paper and other debt sources to finance asset growth.

Q: Finance companies prefer to outwardly purchase equipment and then lease it to a business rather than finance the purchase because they receive part of the lease payment in the form of a down payment from the purchaser.

Q: The largest category of business loans of finance companies is securitized business assets.

Q: Business loans represent 60% of the loan portfolio of finance companies.

Q: A finance company that lends money to high risk customers is known as a subprime lender.

Q: It is impossible for an individual to be approved for a finance company loan with a bankruptcy on their record.

Q: Traditionally, motor vehicle loans and leases are the largest category of consumer loans for finance companies.

Q: Wholesale loans are loan agreements between corporations and their customers at reduced interest rates.

Q: Wholesale and retail motor vehicle loans and leases constitute the largest subcategory of business loans.

Q: Finance companies generally have higher overhead than do commercial banks.

Q: Because finance companies do not accept deposits, they do not have bank regulators providing oversight of their activities.

Q: Finance companies are subject to regulations that restrict the types of products and services they can offer to small business customers.

Q: When a finance company pools mortgages with similar characteristics and securitizes the pool, the loans are removed from the balance sheet of the finance company.

Q: Bad debt expense and administrative costs are lower on home equity loans than other typical loans of finance companies.

Q: The growth in home equity lines of credit over the last two decades has occurred in part because of the tax deductibility of the interest payments.

Q: As of 2012, real estate loans dominated the assets of finance companies.

Q: Securitized mortgage assets are used as collateral backing secondary market securities.

Q: General Electric Capital Corporation is considered a captive finance company.

Q: The largest 20 firms in the nondepository finance company industry account for more than 65 percent of industry assets.

Q: Finance companies generally attract less risky customers than do commercial banks.

Q: The parent institution provides a large portion of the debt that a captive finance company will use to generate personal loans.

Q: Finance companies generally charge lower interest rates on consumer loans than do depository institutions.

Q: Sales finance institutions compete directly with depository institutions for consumer loans.

Q: Over the last 30 years finance companies have replaced real estate loans and other assets with increasing amounts of consumer and business loans.

Q: A major role of the captive finance company is to provide financing for the purchase of products manufactured or sold by the parent company.

Q: Factoring is the process where accounts are purchased by a nonfinancial company at a discount from their face value in exchange for the responsibility of collection.

Q: Equipment leasing to customers is a function of business credit institution.

Q: Personal credit institutions may be willing to approve of collateral that depository institutions do not find acceptable.

Q: Personal credit institutions specialize in making equipment leases to consumers.

Q: Sales finance institutions provide financing to customers of specific retailers.

Q: Finance companies have been among the slowest growing FI groups in recent years.

Q: Finance companies differ from banks in that they do not accept deposits.

Q: During 2006, originations of new subprime mortgages totaled approximately __________, which was ________ of new mortgages originated that year. A. $600 billion; one-fifth B. $400 billion; one-tenth C. $100 billion; one-half D. $400 billion; one-third E. $600 billion; one-half

Q: In contrast to earlier periods in the finance company industry, during the middle 2000s, A. regulatory reform led to decreasing profits. B. mortgages originated were generally not securitized. C. new car loan rates charged by finance companies were been lower than those of commercial banks. D. mortgage lending become less important to the industry. E. finance companies were required to offer time deposit products to their customers.

Q: A person with a history of bad credit and an inconsistent record of payments on other debt is most likely to find a short-term loan through a A. commercial bank. B. personal credit institution. C. savings bank. D. sales finance institution. E. payday lender.

Q: Compared to commercial banks, finance companies usually signal solvency and safety concerns by A. holding higher leverage ratios. B. holding lower capital-asset ratio. C. holding less liquid long-term assets. D. holding higher capital-asset ratio. E. Answers A and B only.

Q: Which of the following observations concerning mortgages is NOT valid? A. They may refer to loans secured by lien on residential houses. B. They are a minor component in finance company portfolios. C. Mortgage-backed securities are created by securitization. D. Home equity loans are examples of second mortgages. E. The interest on a mortgage loan secured by a primary residence is not tax deductible to the homeowner.

Q: Which of the following is traditionally the major type of consumer loans for finance companies? A. Revolving loans. B. Motor vehicle loans and leases. C. Wholesale loans. D. Equipment leases. E. Home equity loans.

Q: Which of the following observations concerning payday lenders is NOT true? A. They provide short-term cash advances. B. Their advances are due when borrowers receive their next paycheck. C. The industry originated from check cashing outlets. D. The payday loan industry is regulated at the state level. E. The demand for short-term loans has decreased considerably.

Q: A company that provides financing to corporations, especially through equipment leasing and factoring would best be categorized as a A. sales finance institution. B. personal credit institution. C. subprime lender. D. loan shark. E. business credit institution.

Q: Compared to commercial banks, why do finance companies often have substantial industry and product expertise? A. Because they have no bank-type regulators looking directly over their shoulders. B. Because they are specialized in market research and analysis. C. Because they are often subsidiaries of corporate-sector holding companies. D. Because they are more often willing to accept risky customers. E. All of the above.

Q: Which of the following might lead a consumer to seek a loan from a subprime lender? A. Inability to document their income. B. Have previously filed for bankruptcy. C. Has never had a loan before. D. Lack of savings for a down payment. E. All of the above.