Nonbank Finance

1
Nonbank Finance

• Chapter 12

2
Insurance Key Terms

• Life vs. Property Casualty
• Permanent (whole, universal, variable life) vs.
  temporary (term)

3
Insurance Management Principles

1. Screening
2. Risk-based premiums
3. Restrictive provisions
4. Prevention of fraud
5. Cancellation of Insurance
6. Deductibles, coinsurance
7. Limits on amount of insurance

4
Pension Funds Key Terms

• Defined contribution plan vs. defined benefit
  plan
• Fully funded vs. underfunded plans.
• Employee Retirement Income Security Act (1974)
• Pension Benefit Guarantee Corporation (Penny
  Benny)

5
Should Social Security be Privatized?

• What type of plan is it (defined contribution or
  defined benefit)?
• Whats the problem?
• What is the trust fund?

6
Finance Companies

• Borrow large, lend small (opposite of depository
  institutions)
• Sales finance companies vs. consumer finance
  companies vs. business finance companies
• Factoring and leasing

7
Mutual Funds

• 80 held by households
• In 1980, 6 of households owned mutual fund
  shares, now its 50
• Institutional investors (managers of mutual funds
  and pension funds) control 50 of outstanding
  stock.
• Open-end funds vs. closed-end funds
• Load vs. no-load funds

8
Money Market Mutual Funds

• In 1970, they were non-existent. Just over 30
  years later, they make up 9 of all financial
  intermediary assets.
• What explains the rapid growth?

9
Hedge Funds

• Typical minimum investment 1 million
• Typical fee 1 of assets, 20 of profits
• Examples Moore Capital Management, Quantum Group
• Legal Restrictions
• No more than 99 investors
• Investor must have annual income gt 200K or gt1
  million in net worth (excluding home)

10
Financial Intermediary Assets in 2002
(percentage of total)
Insurance Companies 17.3
Pension Funds 22.6
Finance Companies 3.2
Mutual Funds 19.4
Depository Institutions 37.7

11
Federal Credit Agencies

• Ginnie Mae, Fannie Mae, Freddie Mac sell bonds
  and buy mortgages from banks.
• Sallie Mae sells bonds and buys student loans.
• Farm Credit system makes loans to farmers.

12
Securities Firms Functions

• Underwriting securities
• Brokerage, financial advice to investors
• Trading for firms own account
• Corporate finance advice (mergers acquisitions)
• Market making (dealers)
• Research (market analysts)

13
Initial Public Offerings

• How are they distributed?
• Whose interest is the underwriter serving?
• Why do they tend to be underpriced?