Commercial bank

Investment bank
Insurance
Tutorial 2 Unit Trust
Pension Fund
1. What are “financial intermediaries”? How can you tell whether they are acting as a broker and principal?
forum/platform individual, business,government
Financial intermediaries are organisations that brings that brings together potential borrowers and potential
lenders. A lender does not need to find an individual borrower but can deposit his money with a bank, building
society, investment trust or other financial intermediary. An intermediary can act as a broker, handling a
transaction on behalf of others or as a principal holding money balances of lenders for lending on to borrowers

2. Discuss about the general roles of the financial intermediaries and briefly discuss the key benefits of the
financial intermediation functions/duties/reasons/benefits/characteristics

Roles of financial intermediaries

-1.Advisory customize a loan for individuals or institutions according to their requirements.

Advice customers on financial matters

Exp : best way to invest their funds

Helps to encourage the flow of saving

2.
- Channeling funds

Able to channel funds to those area that yield the highest return

Gives confidence – saving will earn a good interest

Help to ensure that potentially profitable project able to obtain finance

3.
- Transmitting payments

Use of cheques , debit cards , credit cards , standing order

Can be transfer from one person to another without rely on cash

4.
- Maturity Transformation

Lends for longer period of time than they borrow

Borrow money for long period and depositors want to withdraw on demand
5.
- Risk Transformation

Wiling to take risk

Can absorb the loss – the interest earn on the loans

 Benefits of financial intermediation

6.
- By linking lenders and borrowers

Able to package the amount they lent into the amount

Exp: Banks gather small saving from individuals and repackaging into large bundle

7.
- Risk reduction

Effected by unit trust companies

Exp : Spreading of investment - enable small investor to take advantage of the effect of portfolio

Exp : Bank will make lending to different industries

8.
- Maturity Transformation

Bridging the gap between lenders and borrowers

Exp : Bank – borrowing short and lending long

Reconcile the maturity difference between savers and borrowers

9.
- Reduce the level of transaction

Individual investor - large number of small transaction in order to achieve diversification

Financial intermediaries is to transform savings into investments.

10. Financial intermediaries give long-term and short-term loans.

These institutions accept deposits from entities that have surplus
- Provide information Others?
cash with them and provide loans, either short-term or long-term,
to entities or institutions that are in deficit and require funds to
Improve the efficiency of markets run their functions. -->maturity transformation
Financial intermediaries offering professional service and
11. investment products that help both individuals and entities widen
- Solve the problem of scarcity their returns and reduce financial risks.--> link between
borrowers/lenders. solve problem of scarcity
Commercial bank , leasing companies – gather financial resources and distributes them to productive units

12. - risk management (reduce risk) - protect - regulated - secured

- reduce time - proper platform - so easy to do any transactions
13. related - just online
6-8 marks - some Financial Intermediation - offer liquidity securities - company
= 5 - 6 key points
14. want to find any liquidity instrument - easy
 3. Who are the key participants in the transactions of financial institutions? Who are net suppliers and who are
net demanders?

The key participants in financial transactions are individuals, businesses, and governments.

These parties participate both as suppliers and demanders of funds.

Individuals are net suppliers, which means that they save more dollars than they borrow, while both businesses
and governments are net demanders since they borrow more than they save.

One could say that individuals provide the excess funds required by businesses and governments

functions
4. What role do financial markets play in our economy? What are primary and secondary markets?
What relationship exists between financial institutions and financial markets?

Financial markets provide a forum in which suppliers of funds and demanders of loans and investments can
transact business directly. Newly formed (issued) securities are bought or sold in primary
(first time) markets.
Primary market is the name used to denote the fact that a security is being issued by the demander of funds to the
supplier of funds. An example would be Microsoft Corporation selling new shares of common stock to the public.
existing securities
Secondary market refers to the trading of securities among investors subsequent to the primary market issuance.
In secondary market trading, no new funds are being raised by the demander of funds. The security is trading
ownership among investors. An example would be individual “A” buying common stock of Microsoft through a
broker from individual “B”. 'Financial System'
related
Financial institutions and financial markets are not independent of each other. It is quite common to find financial
institutions actively participating in both the money market and the capital market as both suppliers and
demanders of funds. Financial institutions often channel their investments and obtain needed financing through
the financial markets. This relationship exists since these institutions must use the structure of the financial
marketplace to find a supplier of funds Insurance - received premium - pool of money-allocate for claim, allocate
for investment (invest into financial market:
5. Define ‘money market’. short term securities i.e Banker acceptance,long term: REITs)

The money market is a financial relationship between the suppliers and demanders of short-term debt securities
maturing in one year or less, such as Treasury bills, commercial paper, and negotiable certificates of deposit.

Money market instrument serve

The main difference between the primary and the the dual purpose of allowing
secondary market is when securities issued by the borrowers meet their short-term
Company are traded in the Primary market. No requirements and providing easy
further trades are carried out in the primary liquidity to lenders.
market.
The secondary market is the place where the
existing holders trade the securities with the new
buyers in the market. The investors can carry out
trading the securities in the secondary market as
many times as they want.