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Non-Bank Financial Institutions. Finance Companies, Insurance Companies, Pension Funds, Mutual Funds, and Real Estate Investment Trusts. Non-Bank Financial Institutions. Five categories of Non-Bank financial institutions: Finance Companies Insurance companies Pension Funds Mutual Funds

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non bank financial institutions

Non-Bank Financial Institutions

Finance Companies, Insurance Companies, Pension Funds, Mutual Funds, and Real Estate Investment Trusts

non bank financial institutions2
Non-Bank Financial Institutions

Five categories of Non-Bank financial institutions:

  • Finance Companies
  • Insurance companies
  • Pension Funds
  • Mutual Funds
  • Real Estate Investment Trusts
finance companies
Do not accept deposits.

Obtain funds by issuing commercial paper (short-term, unsecured debt).

Generate revenues by making loans.

Not gov’t regulated like banks.

Consumer Loans:

Debt consolidation

Automobile Loans

Home Improvement Loans

Manufacturer’s Finance Companies:

Loans to customers to purchase products.

Finance Companies
finance companies4
Finance Companies

Three special kinds of loans associated with finance companies:

  • Factoring;
  • Leasing;
  • Floor Plan Loans.

Balance Sheet Summary: Finance Company

Assets Liabilities

Business Loans Capital

Consumer Loans Commercial Paper

Mortgages

cash

insurance companies
Transform Risk.

Spread cost over a large group of policy holders

Insurance Types:

Casualty

Life

Types of Life Insurance:

Term Life -payment made only if death occurred during the term policy

Whole Life -premiums build-up a balance to be paid upon death, or borrowed prior.

Insurance Companies
insurance companies6
Insurance Companies
  • Premiums paid by policyholders are invested in a portfolio.
  • Insurance companies make money by getting a greater rate of return on their investment than what they need to pay-out in claims.
  • Cash Flows required by life insurance companies are more predictable than those for casualty insurance companies.

Balance Sheet Summary: Insurance Company

Assets Liabilities

Corporate Bonds Insurance Policies

Government Bonds Capital

Corporate Stocks

Commercial Mortgages

Cash

pension funds
Exist to pay retirement and death benefits to members.

Typically created by large employers/employer groups.

Plan creator is called the sponsor.

Income and capital gains for the pension fund are tax-deferred.

Pension Plan Types:

Defined Benefit Plan

Defined Contribution Plan

Pension Funds
pension funds8
Pension Funds

Sponsors can manage the fund themselves or hire an external manger (commercial banks and insurance companies).

Balance Sheet Summary: Pension Funds

Assets Liabilities

Stocks Reserves

Bonds

Real Estate

Cash

mutual funds
Sell shares to investors, use proceeds to purchase securities in accordance with the firm’s prospectus.

Mutual Fund advantages are especially important to small investors.

Mutual Fund Advantages:

Professional Management

Diversification

Low Transaction Fees

Mutual Funds
mutual funds10

Balance Sheet Summary: Mutual Funds

Assets Liabilities

Stocks Shares

Gov’t - Secured Home

Mortgage Pools

Government Bonds

Corporate Bonds

Money Market Instruments

Mutual Funds
  • NAV (Net Asset Value) equals the value of the funds assets less debts and other obligations.
  • NAV is calculated daily and is both the buy and sell price.
mutual funds11
Mutual Funds
  • NAV Calculation:
    • Given:
      • Common Stock Value: $10,000
      • Margin Obligations: $5,000
      • Cash & Money Mkt: $2,000
      • Shares Outstanding: 1,000
    • Calculation:
      • NAV = $10,000-$5,000+$2,000 = $7,000
      • NAV/share = $7,000/1,000 = $7/share
mutual funds12
Mutual Funds
  • NAV Calculation:
    • Given:
      • Shares Purchased: 100
      • Cash Received: $700
    • Calculation:
      • NAV = $10,000-$5,000+$2,700 = $7,700
      • NAV/share = $7,700/1,100 = $7/share
mutual funds13
Mutual Funds
  • Mutual Funds do not pay taxes, but the shareholders pay taxes on their share of earnings and realized capital gains.
  • The funds purpose/focus is always stated in the prospectus, which must be followed.
real estate investment trusts
Special class of closed-end investment companies

Do not pay corporate taxes.

Required to distribute at least 95%.

95% of earnings must be from real estate, or gov’t securities.

Real Estate Investment Trusts
pension funds15
Pension Funds

Sponsors can manage the fund themselves or hire an external manger (commercial banks and insurance companies).

Balance Sheet Summary: Mortgage REITs

Assets Liabilities

Mortgages Capital

Government Securities

Balance Sheet Summary: Equity REITs

Assets Liabilities

Real Estate Mortgages

Capital