Financial intermediaries:
A) act as a third party by holding a portfolio of assets and issuing claims based on them to savers.
B) issue claims on future cash flows of individual borrowers directly to lenders.
C) transmit funds directly between lenders and borrowers.
D) usually provide lenders with lower returns than other financial institutions.

Question

Quizplus · Accepted Answer

Financial intermediaries act as intermediaries between savers and borrowers by holding portfolios of assets like loans or securities issued by borrowers. They issue claims based on these assets to savers, thereby providing a link between those who have excess funds (savers) and those who need funds (borrowers). This process is known as financial intermediation. Therefore, option A is the correct choice as it defines the role of financial intermediaries accurately. The other options are incorrect because B is describing securitization and C is describing disintermediation, while D is an incorrect statement as financial intermediaries provide a range of returns to lenders depending on the assets held in the portfolio.

Financial Intermediaries