How Finance Companies Facilitate the Flow of Funds Carson Company has sometimes

Question

How Finance Companies Facilitate the Flow of Funds

Carson Company has sometimes relied on debt financing from Fente Finance Company. Fente has been willing to lend money even when most commercial banks have not. Fente obtains funding from issuing commercial paper and focuses mostly on channeling the funds to borrowers.

a. Explain how finance companies are unique by comparing Fente’s net interest income, noninterest income, noninterest expenses, and loan losses to those of commercial banks.

b. Explain why Fente performs better than commercial banks in some periods.

c. Describe the flow of funds channeled through finance companies to firms such as Carson Company. What is the original source of the money that is channeled to firms or households that borrow from finance companies?

Explanation / Answer

a.Explain how finance companies are unique by comparing Fente’s net interest income, noninterest

income, noninterest expenses, and loan losses to those of commercial banks.  

Fente’s net interest income is higher than that of banks because it provides riskier loans and can

charge a higher interest rate on its loans. Fente’s noninterest income is lower than those of

banks. Fente’s noninterest expenses are lower than that of commercial banks because it does not

need as many employees and infrastructure to run its business. Fente’s loan losses are higher

than that of commercial banks.  

b.Explain why Fente performs better than commercial banks in some periods.

Fente performs better than banks in some periods when the economy is strong, because its loan

losses are low in those periods. However, when the economy is weak, loan losses are high and

more than offset its higher net interest margin.  

c.Describe the flow of funds channeled through finance companies to firms such as Carson

Company. What is the original source of the money that is channeled to firms or households that

borrow from finance companies?

The original source of money is buyers of commercial paper that is issued by finance companies.

Mutual funds and commercial banks are common buyers of commercial paper, but they obtain

their funds from other sources. Banks obtain their funds from households and mutual funds

obtain their funds from individual shareholders.

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