Chapter1_PractiseQs

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Unformatted text preview: s so D is the answer. See page 17. 12 Intermediated finance differs fundamentally from direct finance in that: A) in contrast to a broker who may arrange direct finance, the intermediary acts as a principal and is exposed to default risk Feedback: A crucial difference between directbroker who brings together savers and borrowers B) the intermediary acts as a and intermediated finance relates to the obligations of the parties. For example, direct finance may involve a broker who plays an important role in bringing the parties together C) intermediated finance is generally less costly than direct finance but the broker never has ownership of any securities that are issued. In contrast, a financial intermediary is an D) bank, that accepts deposits and makes loans. Importantly, the institution, such as adirect lenders are exposed to default risk but intermediaries are not deposits are 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 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 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 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...
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This note was uploaded on 03/26/2012 for the course FIN 1612 at University of New South Wales.

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