1. Non-Bank Financial Institutions Finance Companies, Insurance Companies, Pension Funds, Mutual Funds, and Real Estate Investment Trusts Chapter 5 Dr. BALAMURUGAN MUTHURAMAN

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

3. 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.

4. Finance Companies Three special kinds of loans associated with finance companies: Factoring; Leasing; Floor Plan Loans. Balance Sheet Summary: Finance Company AssetsLiabilities Business LoansCapital Consumer LoansCommercial Paper Mortgages cash

5. 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.

6. 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 AssetsLiabilities Corporate BondsInsurance Policies Government BondsCapital Corporate Stocks Commercial Mortgages Cash

7. 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

8. Pension Funds Sponsors can manage the fund themselves or hire an external manger (commercial banks and insurance companies). Balance Sheet Summary: Pension Funds AssetsLiabilities StocksReserves Bonds Real Estate Cash

9. 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

10. 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 AssetsLiabilities Stocks Shares Gov’t - Secured Home Mortgage Pools Government Bonds Corporate Bonds Money Market Instruments

11. 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.

12. 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.

13. Pension Funds Sponsors can manage the fund themselves or hire an external manger (commercial banks and insurance companies). Balance Sheet Summary: Equity REITs AssetsLiabilities Real EstateMortgages Capital Balance Sheet Summary: Mortgage REITs AssetsLiabilities MortgagesCapital Government Securities