a. Carson Company may have the funds from Rimsa because I assume that it fulfills all the conditions to access the funds needed to finance the acquisition or construction of the building. Unlike Carson, Rimsa get the money from the depositors to finance Carson by applying a higher rate of interest on the loan different and higher to the one it pays on deposits. The spread also covers non-interest expenses that incurred.
b. Rimsa decided to apply a fixed rate loan, because the initial spread of the loan would be increased. Sometimes, Rimsa would not expect that interest rates rise and may well benefit from conversion to a fixed rate loan. At the same way, Rimsa may hedge the risk of interest rates with derivative contracts. In general, it is …show more content…
607 Flow of Funds Exercise
a. Fente’s net provides riskier loans, so it can charge a higher interest rate on its loans and that make its interest income to be higher than the one of banks. Fente’s noninterest income and expenses are lower than the one of commercial banks because it does not need as many employees and infrastructure to run its business. As it provides higher risky, people start no trusting banks each other’s but Fente’s loan losses are higher than the one of commercial banks because of the higher risqué taken.
b. Fente performs better than commercial banks in some periods because its performance is linked to the state of the economy, so whether the economy is strong or weak, the level of loan losses depend highly on the state of the economy and more than offset its higher net interest margin in the case of strong economy.
c. the flow of funds channeled through finance companies to firms such as Carson Company can be described as: The original source of money is buyers of commercial paper that is issued by finance companies. Mutual funds and commercial banks are common buyers of commercial paper, but they obtain their funds from other sources. Banks obtain their funds from households and mutual funds obtain their funds from individual …show more content…
Shareholders give money to Venus and it uses to finance Carson against the payment of interest. Carson can use it to develop its activities. In return, Venus will distribute interest payments to shareholders who wish to receive regular income from their investment.
b. Carson interact with Venus Mutual Fund instead of trying to obtain the funds directly from individuals who invested in Venus Mutual Fund because of the lack of the money. So, it is hard to buy large amounts of bonds as Individuals do not have sufficient funds to provide large loans. As Venus Mutual Fund can pool funds, assess creditworthiness, and diversify, the investors who have not the required capacity may decide to invest through the well known Venus Mutual Fund.
c. Yes. It is about balance as one large investor may have more at stake than many small investors. If it happens that Carson or any other issuer of bonds fails to make the payments on the bonds held by Venus that could be affected its performance. So, the fund managers could be fired if they invest in many bonds that default because the profit is the goal that seek the investor to invest its money. A mutual fund has the power to ensure that bond issuers make their payments, If not, the mutual fund has the resources to take action, or could sell a large amount of these bonds in the secondary market, and that would affect the bond price and may lead a decline in its
b. Rimsa decided to apply a fixed rate loan, because the initial spread of the loan would be increased. Sometimes, Rimsa would not expect that interest rates rise and may well benefit from conversion to a fixed rate loan. At the same way, Rimsa may hedge the risk of interest rates with derivative contracts. In general, it is …show more content…
607 Flow of Funds Exercise
a. Fente’s net provides riskier loans, so it can charge a higher interest rate on its loans and that make its interest income to be higher than the one of banks. Fente’s noninterest income and expenses are lower than the one of commercial banks because it does not need as many employees and infrastructure to run its business. As it provides higher risky, people start no trusting banks each other’s but Fente’s loan losses are higher than the one of commercial banks because of the higher risqué taken.
b. Fente performs better than commercial banks in some periods because its performance is linked to the state of the economy, so whether the economy is strong or weak, the level of loan losses depend highly on the state of the economy and more than offset its higher net interest margin in the case of strong economy.
c. the flow of funds channeled through finance companies to firms such as Carson Company can be described as: The original source of money is buyers of commercial paper that is issued by finance companies. Mutual funds and commercial banks are common buyers of commercial paper, but they obtain their funds from other sources. Banks obtain their funds from households and mutual funds obtain their funds from individual …show more content…
Shareholders give money to Venus and it uses to finance Carson against the payment of interest. Carson can use it to develop its activities. In return, Venus will distribute interest payments to shareholders who wish to receive regular income from their investment.
b. Carson interact with Venus Mutual Fund instead of trying to obtain the funds directly from individuals who invested in Venus Mutual Fund because of the lack of the money. So, it is hard to buy large amounts of bonds as Individuals do not have sufficient funds to provide large loans. As Venus Mutual Fund can pool funds, assess creditworthiness, and diversify, the investors who have not the required capacity may decide to invest through the well known Venus Mutual Fund.
c. Yes. It is about balance as one large investor may have more at stake than many small investors. If it happens that Carson or any other issuer of bonds fails to make the payments on the bonds held by Venus that could be affected its performance. So, the fund managers could be fired if they invest in many bonds that default because the profit is the goal that seek the investor to invest its money. A mutual fund has the power to ensure that bond issuers make their payments, If not, the mutual fund has the resources to take action, or could sell a large amount of these bonds in the secondary market, and that would affect the bond price and may lead a decline in its