Wednesday, October 8, 2014

Give an example of three financial intermediaries and explain how they act as a bridge between small investors and large capital markets or corporations?

Give an example of three financial intermediaries and explain how they act as a bridge between small investors and large capital markets or corporations?
- Banks, investment companies, insurance companies and credit unions- Households want desirable investments for their savings, yet the small size of most households makes direct investment difficult. They don't advertize to lend money to businesses and are not equipped to analyze the credit risk of borrowers- For these reasons, financial intermediaries have evolved to bring lenders and borrowers together. i.e. A bank raises funds by borrowing (taking deposits) and lending that money to other borrowers. The sprad between the interest rates paid to depositors and the rates charged to borrowers in the source of the bank's profit. In this way, lenders and borrowers do not need to contact each other directly.

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