Debt holders and owners would normally have the same interests so less

Debt holders and owners would normally have the same

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company. Debt holders and owners would normally have the same interests, so less monitoring is required. However for shareholders, their claim is variable and they are interested in getting higher share prices. It is easy to have diverging interests from managers. 8) Give two reasons why financial intermediaries are the most important source of external funds in the market. Provision of expertise in screening customers, reducing transaction costs and adverse selection. Investors mostly make short-term investments and long-term borrowing, so direct matching is often difficult. Banks can transform these assets so they can accept short- term deposit and lend out long-term loans as the same time. 9) Why banks have incentive to hold excess reserves at times? Reserves are the most liquid types of assets and holding excess reserves reduce the risk of insolvency from bank runs. This is very relevant in crisis situations. The cost of holding reserves is also lower in these cases as lending out the reserves give higher default probability than normal situation. 10) Comparing the term of loans and deposits at a bank, which one typically has longer maturity? When yield curve is now steeply upward sloping or when it is flat, which case would lead to higher profitability for banks? Explain.
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