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
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
Three special kinds of loans associated with
finance companies:
Factoring;
Leasing;
Floor Plan Loans.
Balance Sheet Summary: Finance Company
Assets
Liabilities
Business Loans
Consumer Loans
Mortgages
cash
Capital
Commercial Paper
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
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
Government Bonds
Corporate Stocks
Commercial Mortgages
Cash
Insurance Policies
Capital
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
Sponsors can manage the fund themselves or hire
an external manger (commercial banks and
insurance companies).
Balance Sheet Summary: Pension Funds
Assets
Liabilities
Stocks
Bonds
Real Estate
Cash
Reserves
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
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.
Balance Sheet Summary: Mutual Funds
Assets
Liabilities
Stocks
Gov’t - Secured Home
Mortgage Pools
Government Bonds
Corporate Bonds
Money Market Instruments
Shares
Mutual Funds
NAV Calculation:
Given:
Common Stock Value:
Margin Obligations:
Cash & Money Mkt:
Shares Outstanding:
$10,000
$5,000
$2,000
1,000
Calculation:
NAV = $10,000-$5,000+$2,000 = $7,000
NAV/share = $7,000/1,000 = $7/share
Mutual Funds
NAV Calculation:
Given:
Shares Purchased:
Cash Received:
100
$700
Calculation:
NAV = $10,000-$5,000+$2,700 = $7,700
NAV/share = $7,700/1,100 = $7/share
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 closedend 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.
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
Government Securities
Capital
Balance Sheet Summary: Equity REITs
Assets
Liabilities
Real Estate
Mortgages
Capital