Financial Intermediaries and the U.S. Banking System Test Questions Fully Solved
Financial Intermediaries - Answers Specialized financial firms that facilitate the indirect transfer of funds
from savers to borrowers by offering savings instruments and borrowing instruments.
Financial Intermediation - Answers The process by which financial intermediaries transform funds
provided by savers into funds used by borrowers.
Benefits of Intermediaries - Answers Reduced costs, risk/diversification, funds divisibility/pooling,
financial flexibility, and related services.
Reduced Costs - Answers More cost efficient because they have expertise in creating combinations of
financial products matching funds by savers with needs of borrowers and spread costs over many
transactions (economies of scale).
Risk/Diversification - Answers Their loan portfolios are diversified with a variety of borrowers,
maturities, and types of loans, thus risk is spread and reduced.
Funds Divisibility/Pooling - Answers They make large loans to a single borrower or small loans to a large
number of borrowers by pooling funds in different denominations.
Financial Flexibility - Answers A variety of products offered by intermediaries equals financial flexibility.
Related Services - Answers Payment services, forecasting, financial planning, and advising.
Types of Intermediaries - Answers Commercial banks, credit unions, thrift institutions, mutual funds,
whole life insurance companies, and pension funds.
Commercial Banks - Answers Traditional 'department stores of finance': checking and savings accounts;
check clearing services, expanding into insurance, stock broker services, and trust operations.
Credit Unions - Answers Not-for-profit businesses managed by member depositors elected by other
members, primarily providing loans for car purchases and home improvements.
Thrift Institutions - Answers Savers with small savings, borrowers needing long-term loans to buy
houses.
Mutual Funds - Answers Investment companies that achieve economies of scale in buying, selling, and
managing securities/portfolios and reduce risk through diversification.
Whole Life Insurance Companies - Answers Provide both insurance and tax-deferred savings plans,
investing part of premiums from policies and using the other part to cover claims.
Pension Funds - Answers Plans funded by corporations or government agencies, administered by the
trust department of commercial banks.
Financial Intermediaries - Answers Specialized financial firms that facilitate the indirect transfer of funds
from savers to borrowers by offering savings instruments and borrowing instruments.
Financial Intermediation - Answers The process by which financial intermediaries transform funds
provided by savers into funds used by borrowers.
Benefits of Intermediaries - Answers Reduced costs, risk/diversification, funds divisibility/pooling,
financial flexibility, and related services.
Reduced Costs - Answers More cost efficient because they have expertise in creating combinations of
financial products matching funds by savers with needs of borrowers and spread costs over many
transactions (economies of scale).
Risk/Diversification - Answers Their loan portfolios are diversified with a variety of borrowers,
maturities, and types of loans, thus risk is spread and reduced.
Funds Divisibility/Pooling - Answers They make large loans to a single borrower or small loans to a large
number of borrowers by pooling funds in different denominations.
Financial Flexibility - Answers A variety of products offered by intermediaries equals financial flexibility.
Related Services - Answers Payment services, forecasting, financial planning, and advising.
Types of Intermediaries - Answers Commercial banks, credit unions, thrift institutions, mutual funds,
whole life insurance companies, and pension funds.
Commercial Banks - Answers Traditional 'department stores of finance': checking and savings accounts;
check clearing services, expanding into insurance, stock broker services, and trust operations.
Credit Unions - Answers Not-for-profit businesses managed by member depositors elected by other
members, primarily providing loans for car purchases and home improvements.
Thrift Institutions - Answers Savers with small savings, borrowers needing long-term loans to buy
houses.
Mutual Funds - Answers Investment companies that achieve economies of scale in buying, selling, and
managing securities/portfolios and reduce risk through diversification.
Whole Life Insurance Companies - Answers Provide both insurance and tax-deferred savings plans,
investing part of premiums from policies and using the other part to cover claims.
Pension Funds - Answers Plans funded by corporations or government agencies, administered by the
trust department of commercial banks.
