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In summary a is accurate while b c and d are not so a

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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 4 13 INCORRECT 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 funds B) not all of the financial instruments issued by users of funds have an active secondary market C) the transaction costs associated with a direct issue of securities are usually insignificant D) 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 4 14 INCORRECT 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 4 15 CORRECT The domestic economy can be di...
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