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Nonbank Finance

Nonbank Finance. Chapter 12. Insurance: Key Terms. Life vs. Property & Casualty Permanent (whole, universal, variable life) vs. temporary (term). Insurance: Management Principles. Screening Risk-based premiums Restrictive provisions Prevention of fraud Cancellation of Insurance

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Nonbank Finance

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  1. Nonbank Finance Chapter 12 Maclachlan, Money & Banking Spring 2005

  2. Insurance: Key Terms • Life vs. Property & Casualty • Permanent (whole, universal, variable life) vs. temporary (term) Maclachlan, Money & Banking Spring 2005

  3. Insurance: Management Principles • Screening • Risk-based premiums • Restrictive provisions • Prevention of fraud • Cancellation of Insurance • Deductibles, coinsurance • Limits on amount of insurance Maclachlan, Money & Banking Spring 2005

  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) Maclachlan, Money & Banking Spring 2005

  5. Should Social Security be Privatized? • What type of plan is it (defined contribution or defined benefit)? • What’s the problem? • What is the trust fund? Maclachlan, Money & Banking Spring 2005

  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 Maclachlan, Money & Banking Spring 2005

  7. Mutual Funds • 80% held by households • In 1980, 6% of households owned mutual fund shares, now it’s 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 Maclachlan, Money & Banking Spring 2005

  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? Maclachlan, Money & Banking Spring 2005

  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 > $200K or >$1 million in net worth (excluding home) Maclachlan, Money & Banking Spring 2005

  10. Financial Intermediary Assets in 2002 (percentage of total) Maclachlan, Money & Banking Spring 2005

  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. Maclachlan, Money & Banking Spring 2005

  12. Securities Firms: Functions • Underwriting securities • Brokerage, financial advice to investors • Trading for firm’s own account • Corporate finance advice (mergers & acquisitions) • Market making (dealers) • Research (market analysts) Maclachlan, Money & Banking Spring 2005

  13. Initial Public Offerings How are they distributed? Whose interest is the underwriter serving? Why do they tend to be underpriced? Maclachlan, Money & Banking Spring 2005

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