chapter 13 nondepository financial institutions. 5 main types of nondepository institutions 1.life...

Chapter 13

Nondepository Financial Institutions

5 MAIN TYPES OF NONDEPOSITORY INSTITUTIONS

1. LIFE INSURANCE COMPANIES

2. PENSION FUNDS (RETIREMENT)

3. PROPERTY AND CASUALTY 受害者 (Shòuhài zhě) INSURANCE COs.

4. MUTUAL FUNDS

5. FINANCE COMPANIES

6. SECURITIES, BROKERS, INVESTMENT Cos.

7. VENTURE CAPITAL & HEDGE FUNDCopyright © 2004 Pearson Addison-Wesley. All rights reserved. 13-2

Copyright © 2004 Pearson Addison-Wesley. All rights reserved. 13-3

Life Insurance Companies

• The first life insurance company in the U.S.

was established before the Revolutionary War

(1770’s) and is still in business.• Two Types of Structures for Insurance Co.

1. Stock companies (owned by shareholders)

2. Mutual associations (ownership by the policyholders 保险客户 bǎoxiǎn kèhù)

Certificate of insurance 保险证书 (bǎoxiǎn) zhèngshū

• The policy states the term (number of years) and the premium or cost


Life Insurance Companies (Cont.)

• Regulation of life insurance companies includes:– Sales practices (must be ethical)– Premium rates (insurance cost)– Allowable investments (earns interest)

• Regulation is done by the state banking authority



• 2 Main Types of life insurance policies:1. Whole Life or Universal Insurance

• Same premium that is paid through entire time of policy

• Build up cash reserves or savings which can be withdrawn as borrowing or by closing the policy

• Savings part pays a money market rate of interest



• Types of life insurance policies: (Cont.)

2. Term Life Insurance• Just insurance with no cash reserve or savings • Premiums are relatively low at first but increase with the

age of the insured individual• Covers a period of time, say 20 or 30 years.• Once the term expires insurance is cancelled.



• Based on actuarial 精算 (Jīngsuàn) tables, life insurance companies have ability to predict cash flow

• Typically insurance companies use excess funds to buy long-term corporate bonds (20 to 30 years) and commercial mortgages– Higher yields– Unlikely of having to sell prior to maturity

• However, some may buy riskier securities such as common stock and real estate

ACTUARIAL TABLE



Pension Funds (Retirement)

• Individuals need pension plans to add to Social Security benefits (government money)

• Most pension fund assets are in employer-sponsored plans

• Two Types of Employer Plans

1. Defined Benefit Plan– Retirement benefits are defined by the plan– Employer only gives to this plan. In America,

pension plans are going away as companies do not want to give this benefit anymore.


Pension Funds (Cont.)

• 2. Defined Contribution 贡献 (Gòngxiàn) Plan

– Contributions (giving) are defined by the plan.– Contribution may be made by employees or

employers or by both. Matching funds.– Employee contributions are taxed when the funds

are taken out– Employee can choose the assets in which to

invest. Create a portfolio of securities.– Most common are 403(b) (government

employees) and 401(k)


Pension Funds (Cont.)

• In addition to employer-sponsored plans, some individuals set up their own pension plans– Keogh Plans—self-employed individuals– Individual Retirement Accounts (IRAs)—

working people who are not covered by company-sponsored pension plans


Property & Casualty Insurance Companies (fire and theft protection)

• Because of uncertainty of liability in this type of insurance, unable to plan their cash pay out requirements

• Invest in municipal (local government) bonds and liquid short-term securities– Lower yields– Highly liquid

• Regulated by the states


Property and Casualty Insurance Companies (Cont.)

• State insurance comisssions set the rates (costs of insurance and enforce 执行 (Zhíxíng) operating standards, and supervision over company policies


Mutual Funds

• Money Market Mutual funds have been on the American financial scene since the 1970s

• A mutual fund pools (puts money together) the funds of many people and managers invest the money in a diversified portfolio of securities.

• Shares represent a portion of ownership in a portfolio held by the fund.

• One fund may have stock from 100 different companies. Shares the risk.


Mutual Funds (Cont.)• Mutual funds are regulated by the Securities

and Exchange Commission (SEC)• Primary goal of regulation is to protect the

investor, you and me.• Many investors are attracted to families of

mutual funds– Number of mutual funds operated under one

management umbrella– Investors can easily transfer money among funds

within the family

Mutual Fund Illustration – example of 1 fund


Alibaba Bank of China Baidu TenCent

Air China China Unicom China Offshore Oil

China Tobacco Dennis Sinopec and many moreA mutual fund is a “pool” of funds from many different companies


Finance Companies

• Consumer Finance Companies– Make consumer loans– Specialty Finance Companies—specialize in

credit card financing

• Commercial finance Companies• Make commercial loans usually on a secured

(collateral) 的抵押品 (de dǐyā pǐn) basis– Loans not as risky as consumer loans

• Since lending is short-term, these companies borrow large amounts in commercial paper market


Finance Companies (Cont.)

• Finance companies play an important role in financing growing small, under-funded companies.

• Commercial finance companies originated the concept of leveraged buyout (LBOs) which relies heavily on debt to pay for acquisition of a company


Securities Brokers and Dealers and Investment Banks

• These financial institutions play a crucial role in the distribution and trading of huge amounts of securities

• Investment banks– Sell and distribute new stocks (Primary Market)

and bonds directly from issuing corporations to original purchasers


Securities Brokers and Dealers and Investment Banks (Cont.)

• Investment banks (Cont.)– Investment banks get a large amount of

income from offering advice (information) to firms involved in mergers and acquisitions

• What price one firm should pay for another• How the transaction should be structured• Provide strategic advice in hostile takeovers—

when one firm seeks to acquire another against the other’s wishes


Securities Brokers and Dealers and Investment Banks (Cont.)

• Brokers and Dealers– Involved in the secondary market, trading

exisiting securities– Brokers bring together buyers and sellers

and earn a commission, a fee.– Dealers commit their own capital in the

buying and selling of securities and make profit on the transaction


Venture Capital Funds & Hedge Funds

• Venture capital funds and hedge funds are usually not available to public investors

• Funding comes from wealthy individuals or other financial institutions.

• Venture capital funds provide an important source of funding to small and midsize companies


Venture Capital Funds and Hedge Funds

• Venture Capital Funds– Invest funds in start-up companies

– The Venture Capital Fund receives a substantial equity (ownership) in the firm

– Makes profits when it takes the successful company public in an initial public offering (IPO).


Banks Versus Nondepository Institutions

• Many nondepository institutions offer services that compete directly with banks

• Today Banks or depository institutions compete with Nondepository institutions for the same business

• The Gramm-Leach-Bliley Act of 1999 allowed the creation of financial holding companies (FHCs) that can own commercial banks, investment banks, and insurance underwriters 承销商 Chéngxiāo shāng

CHAPTER 13 SUMMARY

1. Life Insurance Companies

A. Two main types of Life Insurance

i. Whole Life premiums paid for life, builds up a cash value.

ii. Term – covers a time i.e. 20 years

B. Premiums and payouts based on actuarial tables.

C. Buy long-term securities to fund policies


CHAPTER 13 SUMMARY

2. Pension Funds (Retirement)

A. 2 Types of Employer (Company) Plans

1. Defined Benefit – Employers define plan and pay into it.

2. Defined Contribution – Employers and employees pay into it. 403b or 401k. Most common now. Employees can choose what they want to invest in.

B. 2 Types of Individual Plans

1. Keough – self employed

2. IRA – Individual Retirement Account


CHAPTER 13 SUMMARY

3. Property & Casualty Insurance

To protect your home and property from loss such as fire, flood, etc.

These companies invest in shorter term securities. Need liquidity as they don’t know when that may have to pay out.

4. Mutual Fund – pools the funds of many investors and offers diversified portfolio of investment instuments.


CHAPTER 13 SUMMARY

5. Finance Companies

A. Consumer – Focus on personal loans and credit cards.

B. Commercial – collateral based loans, less risky, short term, use of commercial paper.

6. Brokers, dealers, Investment Banks

A. Sell new stocks in Primary Market

B. Offer advice and information

C. Advice in “hostile takeovers”.Copyright © 2004 Pearson Addison-Wesley. All rights reserved. 13-28

CHAPTER 13 SUMMARY7. Venture Capital and Hedge Funds

A. Funding for small to mid-size companies and for start-up companies

B. Funds from wealthy individuals

C. Return on money comes when a start-up company goes public as an IPO (initial public offering).

The Gramm-Leach Bliley Act of 1999 allowed banks to once again own these companies creating Financial Holding Companies


chapter 13 nondepository financial institutions. 5 main types of nondepository institutions 1.life...

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