Fundamentals of Finance Unit 2 Quiz

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Questions and Answers

What are financial intermediaries?

Financial intermediaries are financial firms that facilitate the transfer of funds between surplus and deficit agents by transforming assets, providing investment guidance, and managing portfolios.

Which of the following is NOT a role of financial intermediaries?

Providing a payments mechanism

Offering cash services (correct)

Reducing risks via diversification

Maturity Intermediation

What does maturity transformation refer to?

Maturity transformation refers to the process by which financial intermediaries convert short-term liabilities into long-term assets.

Financial intermediaries provide a higher risk for small investors through diversification.

False Signup and view all the answers

What is the difference between direct and indirect finance?

Direct finance involves a direct link between surplus and deficit agents, while indirect finance involves the use of financial intermediaries. Signup and view all the answers

Which of the following is NOT a risk faced by depository institutions?

Market Volatility Risks Signup and view all the answers

What is spread income in the context of depository institutions?

Spread income refers to the difference between the cost of deposits and the return from loans or investments. Signup and view all the answers

Which type of financial intermediary manages funds for individuals and organizations?

Asset Management Firms Signup and view all the answers

What do financial intermediaries create through non-cash means?

An effective payments system Signup and view all the answers

Deposit institutions create their assets by accepting deposits from deficit agents.

False Signup and view all the answers

What do some financial institutions provide to meet the needs of agents?

Specialised tailor-made financial products Signup and view all the answers

Financial intermediaries manage information processing costs by hiring a team of _____.

financial analysts Signup and view all the answers

Name one suggested reading on financial markets.

Foundations of Financial Markets and Institutions Signup and view all the answers

Match the following resources with their descriptions:

Fabozzi et al., Foundations of Financial Markets and Institutions = A fundamental book on financial markets Keith Pilbeam, Finance and Financial Markets = A comprehensive overview of finance J. Rutterford, Introduction to Stock Exchange Investment = An introduction to stock investments Signup and view all the answers

Study Notes

Financial Intermediaries Overview

Financial intermediaries play crucial roles in the economy by facilitating the transfer of funds between surplus agents (savers) and deficit agents (borrowers).
They provide a variety of services, transforming financial assets, exchanging assets, underwriting new assets, offering investment guidance, and managing investment portfolios.

Role of Financial Intermediaries

Maturity Intermediation: They convert short-term liabilities into long-term assets, thereby addressing various borrowing and investment needs.
Reducing Risks through Diversification: Investment companies pool funds from multiple small investors to diversify investments, achieving cost-effective risk management.
Reducing Contracting and Information Processing Costs: They manage information about borrowers, lowering costs associated with assessing creditworthiness and facilitating transactions.
Providing a Payment Mechanism: They enable non-cash transactions, enhancing the efficiency of the payment system in both local and international contexts.

Asset Management Firms

Asset management firms, also known as money management firms, manage funds for individuals and organizations, earning fees based on the asset value or performance.
They invest in diverse assets such as stocks, bonds, real estate, and currencies, with various fund types catering to specific investment objectives.

Depository Institutions

Major types of depository institutions include commercial banks and savings institutions, which create liabilities by accepting deposits and assets by issuing loans.
They operate under heavy regulation due to their significant role in the financial system, with profitability coming from the difference between funding costs and returns on assets.

Risks Faced by Depository Institutions

Credit or Default Risks: Risk of borrowers failing to meet their obligations. Mitigation strategies include requiring collateral.
Regulatory Risks: Changes in regulations can increase operating costs or decrease revenues, impacting profitability.
Interest Rate Risks: Fluctuating interest rates affect the spread between what banks pay on deposits and what they earn from loans.
Liquidity Risks: The mismatch between short-term liabilities (deposits) and long-term assets (loans) creates risk during large withdrawals.

Summary of Key Concepts

Financial intermediaries are essential for efficient fund transfers between surpluses and deficits.
Direct finance occurs when surplus and deficit agents interact directly, while indirect finance involves financial intermediaries.
Financial intermediaries enhance market effectiveness through diversification, reduced processing costs, and payment systems that facilitate transactions without cash.

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Description

Test your knowledge on Financial Intermediaries as covered in Unit 2 of the Fundamentals of Finance course. This quiz will explore the roles and functions of various financial institutions, including how they manage risks and costs, as well as their significance in asset management. Prepare to enhance your understanding of financial practices!