The transfer of capital between savers and lenders Financial intermediaries freq

Question

The transfer of capital between savers and lenders

Financial intermediaries frequently offer a variety of benefits to both the borrowers attempting to raise capital in the financial markets and the economies that allow them to function.

Read the following statements. Then, identify the benefits or services that may be provided by a financial intermediary. Check all that apply.

Check all that apply.

...Financial intermediaries have the ability to pool the savings of many savers in order to convert short- or long-term deposits into long-or short-term investments (loans).

...Financial intermediaries are able to offer their customers (both borrowers and savers) considerable flexibility in the form of the maturities, denominations, and features of the transactions written.

...Financial intermediaries promote the face-to-face exchange of money and securities between the borrower and the saver.

...Financial intermediaries may purchase the securities from the borrower (a corporation).

Financial transfers of capital generally take one of three forms. In the following table, correctly identify the methods of transfer being described.

Scenario

Direct Transfer

Transfer through an Investment Banking House

Transfer through a Financial Intermediary

Based on your evaluation of the information in the preceding table, decide if the following statement is true or false.

True or False: The existence of financial middlemen and financial intermediaries decreases the efficiency of the financial markets.

False

True

Scenario

Direct Transfer

Transfer through an Investment Banking House

Transfer through a Financial Intermediary

Acme Manufacturing, Inc. is a business partner of Smith Enterprises. To help its partner through a three-day budget shortfall, Smith Enterprises is willing to make a direct loan of $35,000 to Acme Manufacturing, Inc. for the three days. Marston Manufacturing Company has a temporary surplus of funds to invest. To help locate a creditworthy borrower, the CFO has retained an investment broker who maintains a book of individuals and businesses seeking capital. Last week Jorge purchased a financial contract that will pay his heirs a lump-sum payment in the event of his death. This organization pools the funds deposited by a large number of policyholders.

Explanation / Answer

Part 1: Benefits of financial intermediaries:

Part 2.

Acme Manufacturing : Direct Transfer

Martson Manufacturing : Transfer through Investment Banking House

Jorge case: Transfer through a financial intermediary

The efficiency for the financial markets is defined as the ease of with which the funds can be transferred from savers to borrowers at lowest cost and into highest return asset (optimal usage). Since the financial intermediaries are required to pool in the assets and benefit from the economies of scale associated with the same, the given statement is False.

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