Question

1. Provide a general historic description of the predominant source and use of funds for thrifts.

2. Provide a general historic description of the predominant source and use of funds for pension plans.

3. Explain why/how contributions to mutual funds are often considered riskier than contributions to pension funds.

4. How do the customers of a finance company differ from the customers of banks generally?

Answer 1

1) Thrift Bank or Thrift are the type of financial institution which specializes in providing savings accounts and home mortgages for consumers. Thrift also provides checking accounts, personal or car loans, credit cards, etc.. They can be a corporate entities (i.e. owned by their shareholders) or mutually-owned (i.e. owned by their borrowers and depositors). The thrift institution began at the beginning of the 18th century with the establishment of the customer-owned building society in the UK. To improve the market for mortgages in the U.S., the U.K.'s customer-owned building society was created as was referred to as Savings and Loan Associations (S&Ls). In 1932, the Federal Home Loan Bank Act was passed by the then President Herbert Hoover. This act was passed to encourage homeownership. A source of low-cost funds was provided to member banks so that they can use it in extending mortgage loans. The Federal Home Loan Bank Board was also created as a result of this Act. The task of the Board was to facilitate the development of a secondary market for mortgages, while the Savings and Loan Associations (S&Ls) was created to issue those mortgages.

2) Pension Funds uses their fund to invest in fixed-income securities along with blue-chip stocks. Now a days they also have started investing in private equity, real estate, infrastructure, and securities like gold.

3) Pension Funds are the pool of funds that are set aside by a person for future benefits. Generally, in this, the investments are done by the employer on behalf the employee. The earnings on these investments are the income of the employee upon retirement. So these type of funds needs to be managed prudently to ensure that promised retirement benefits could be provided to the retirees. Earlier these funds used to invest only in the blue-chip stocks, government securities and investment-grade bonds, so that risk can be minimize and the person can get retired benefits. But with the need to maintain a high-enough rate of return, these pension funds stated investing in some other asset classes as well. As pension funds promises their participants to pay a certain level of retirement income in the future, they are relatively conservative risk wise. So a big chunk of pension portfolios includes fixed-income securities along with blue-chip stocks. Increasingly, these funds have started adding real estate and alternative asset classes to their portfolio for the added returns, still these pieces remains relatively small parts of their portfolios. Where as mutual funds are the pool of funds that borrow money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. Although mutual funds are managed by professional investment manager and are potential diversification, they are still purely on the market risk. There is no guarantee of any sort of income and one can loose its investment as well. So a contributions to mutual funds could be riskier than contributions to pension funds.

4) Finance companies are the institutions that provides credit for the purchase of consumer goods and services. Unlike a bank, finance companies do not accept deposits. So main customers of a banks are the depositor who deposits their money in the bank. Bank then lend that money to the credit seekers so as to earn money for their operations. While the main customers of a finance company are the creditors. Customers of a bank and the finance company who are seeking for loan/credit are also quite different. Finance companies often provide loans much higher risk than banks. These high-risk customers generally do not have any other source to take loans from other than these finance companies.