Question

a. What is duration? Why is it important?

b. What is a sub-prime lender? Do they operate differently compared to other lenders?

c. Why would a manufacturing company create its own financial services company?

Answer 1

1.

Duration is the amount of time it takes to recover the investment. Also, it shows the percentage change in price of the bond with change in interest rates. It is important because based on one's view of the interest rates fall/decline one can choose low/high duration.

2.

Sub prime lender is a lender who lends to borrowers who are not able to qualify for prime rate borrowing because of weak or limited credit history. They have higher rates, closing costs or require huge downpayment.

3.

So that it can manage its capital needs at lower cost and park excess funds at higher rates