Finance Companies-- Types Sales Finance

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Finance Companies-- Types Sales Finance

  1. 1. Finance Companies-- Types <ul><li>Sales Finance </li></ul><ul><li>Personal Credit </li></ul><ul><li>Business Credit </li></ul><ul><li>Differ from banks? </li></ul><ul><li>Types of lending </li></ul><ul><ul><li>consumer </li></ul></ul><ul><ul><li>business </li></ul></ul><ul><ul><li>mortgage </li></ul></ul>
  2. 2. Balance sheet and trends <ul><li>Business and consumer loans are major assets </li></ul><ul><ul><li>63% 1997 </li></ul></ul><ul><ul><li>95% 1977 </li></ul></ul><ul><li>Increases in real estate loans </li></ul><ul><li>Growth in leasing </li></ul>
  3. 3. Balance sheet and trends <ul><li>Consumer loans </li></ul><ul><ul><li>Primarily motor vehicle </li></ul></ul><ul><ul><li>Generally riskier customers than banks </li></ul></ul><ul><ul><li>Increase in loan shark firms </li></ul></ul><ul><li>Mortgages </li></ul><ul><ul><li>Recent addition to finance co. assets </li></ul></ul><ul><ul><li>May be direct mortgages </li></ul></ul><ul><ul><li>Growth in home equity lending </li></ul></ul>
  4. 4. Balance sheet and trends <ul><li>Business Loans </li></ul><ul><ul><li>Business loans comprise the largest portion </li></ul></ul><ul><li>Liabilities </li></ul><ul><ul><li>Commercial paper and other debt </li></ul></ul><ul><ul><li>Finance firms are the largest issuers of commercial paper </li></ul></ul>
  5. 5. Asset Securitization <ul><li>“ the process of pooling and packaging existing loans into securities suitable for resale” </li></ul><ul><li>Home mortgages Auto loans </li></ul><ul><li>5 Step process </li></ul><ul><li>1. loan originator </li></ul><ul><li>2. the loan purchase </li></ul><ul><li>3. the loan pooler </li></ul><ul><li>4. the guarantor (optional) </li></ul><ul><li>5. the investor </li></ul>
  6. 6. Securitization <ul><li>Asset is homogenous </li></ul><ul><li>Terms on loans are standardized </li></ul><ul><li>Asset-backed loans </li></ul><ul><li>Often guarantors </li></ul><ul><li>Investor purchases diversified pool </li></ul>
  7. 7. Captive Finance Companies <ul><li>Captive examples </li></ul><ul><ul><li>GMAC </li></ul></ul><ul><ul><ul><li>$80 Billion </li></ul></ul></ul><ul><ul><ul><li>68% of assets in receivables </li></ul></ul></ul><ul><ul><ul><li>40% liabilities notes payable </li></ul></ul></ul><ul><ul><ul><li>33% long term debt </li></ul></ul></ul><ul><ul><ul><li>16% equity </li></ul></ul></ul><ul><ul><li>Ford Motor Credit </li></ul></ul><ul><ul><ul><li>$70 billion </li></ul></ul></ul><ul><ul><ul><li>73% of assets in receivables </li></ul></ul></ul><ul><ul><ul><li>81% short term credit </li></ul></ul></ul><ul><ul><ul><li>16% equity </li></ul></ul></ul>
  8. 8. Regulations <ul><ul><li>Fed reserve definition </li></ul></ul><ul><ul><ul><li>“ Firm, other than a depository institution, whose primary assets are loans to individuals and businesses” </li></ul></ul></ul><ul><ul><li>Subject to state-imposed usuary ceilings </li></ul></ul><ul><ul><li>Much lower regulatory burden </li></ul></ul><ul><ul><li>Lower leverage </li></ul></ul>
  9. 9. Summary question 5-6 <ul><li>What advantages do finance companies have over banks in offering services to small business customers? </li></ul><ul><li>Why is the rate charged on motor vehicle loans often higher for a finance company than a commercial bank? </li></ul>
  10. 10. Mutual Funds <ul><li>4-1 </li></ul><ul><ul><li>What is a mutual fund and in what sense is a mutual fund a financial intermediary? </li></ul></ul><ul><li>4-6 </li></ul><ul><ul><li>What economic reasons can you provide for the existence of mutual funds? </li></ul></ul>
  11. 11. Mutual Funds <ul><li>Open ended </li></ul><ul><li>Close ended </li></ul><ul><li>End of 1997 </li></ul><ul><ul><li>> 5300 stock and bonds mutual companies </li></ul></ul><ul><ul><li>$3.7 trillion </li></ul></ul>
  12. 12. Size, structure and composition <ul><li>First mutual fund </li></ul><ul><li>Slow initial growth </li></ul><ul><li>Advent of money market mutual funds </li></ul><ul><ul><li>Regulation Q </li></ul></ul><ul><li>Total assets </li></ul><ul><ul><li>1940 $0.4 billion </li></ul></ul><ul><ul><li>1990 $568 billion </li></ul></ul><ul><li>By asset size the second most important group </li></ul>
  13. 13. Types of funds <ul><li>Long term funds </li></ul><ul><li>Short term funds </li></ul>
  14. 14. Regulation <ul><li>SEC </li></ul><ul><li>NASD </li></ul>
  15. 15. Valuation -- Net Asset Value (NAV) <ul><li>Three factors affecting NAV / income on fund </li></ul><ul><ul><li>dividends and income earned on assets </li></ul></ul><ul><ul><li>capital gains or losses when the assets are sold </li></ul></ul><ul><ul><li>capital appreciation in the underlying value of the stocks held in the portfolio </li></ul></ul>
  16. 16. 4-14 <ul><li>Open end Fund A has 100 shares of ATT @ $100 each and 50 Shares of Toro at $50 each. </li></ul><ul><li>Closed-end fund has 75 shares of ATT and 100 shares of Toro. </li></ul><ul><li>Both funds issued 100 shares </li></ul><ul><li>What is NAV of each? </li></ul><ul><li>If ATT increases to $105 and Toro declines to $45, how does that impact NAV? </li></ul><ul><li>Assume another 100 shares of ATT are added to A. What is NAV of A if original price remains unchanged ($100)? </li></ul>
  17. 17. 4-12 <ul><li>A mutual fund has 400 shares of Fiat, Inc., currently trading at $7 and 400 shares of Microsoft, currently trading at $70. </li></ul><ul><li>100 shares outstanding </li></ul><ul><ul><li>NAV? </li></ul></ul><ul><ul><li>If investors expect the price of Fiat shares to increase to $9 and Microsoft’s to decline to $55 by the end of the year, what is the expected NAV at the end of the year? </li></ul></ul><ul><ul><li>What is the maximum that the price of Microsoft can decline to maintain the NAV as estimated above? </li></ul></ul>

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