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Unformatted text preview: a liability of the
bank and must be repaid even if some borrowers fail to repay their loans. In summary, A is accurate while B, C
and D are not, so A is the correct answer. See page 19. 13
Which of the following statements about the disadvantages of direct financing is not correct?
A) direct financing can involve difficulties in matching the preferences of the suppliers and users of
not all of the financial instruments issued by users of funds have an active secondary market
the transaction costs associated with a direct issue of securities are usually insignificant
investors may find it difficult to assess the default risk of securities issued directly by a borrower
Feedback: An issue of securities can involve costs that are quite significant, such as the costs of preparing a
prospectus, so the statement in C is wrong, making it the correct answer. See page 19. 14
Feedback: There are many benefits ofintermediation include combining funds from many small deposits to
The benefits of financial financial intermediation. Which of the following are valid benefits? I asset
transformation II transformation’) and using short-term deposits to provide long-term V credit risk
provide large loans (‘assetincreased market profile III maturity transformation IV liability managementloans (‘maturity
A) I, II, V, VI
diversification VI lower scale costs for lenders and borrowers
transformation’). Because of V search of their operations, financial intermediaries are able to diversify credit
B) I, III, IV, the
risk more effectively than most individual investors and the ready availability of deposits with, and loans from,
C) I, III, IV, VI
intermediaries should result in lower search costs for lenders and borrowers. In summary, I, III, V and VI are
D) I, III, V, VI
benefits of financial intermediation relative to direct finance. Direct borrowing may increase a company’s market
profile and the need for liability management increases the cost of intermediation, so II and IV are not benefits of
intermediation. See page 20. 15
The domestic economy can be di...
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This note was uploaded on 03/26/2012 for the course FIN 1612 at University of New South Wales.