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Finance Questions Question 1 When we talk about capital markets, the firms and individuals present there usually borrow on a long-term basis. This means that there are either people who want to spend more than they presently earn (deficit units) or those who spend lesser than their current income, namely surplus units…
The latter performs the process of lending after purchasing securities from the market instead of directly giving out loans. These include insurance companies, investment trusts, pension funds, mutual funds and so on. The major outcome of financial intermediaries is to ensure that at all times there is a steady flow of funds, including cash, which moves smoothly from the surplus units to the deficit units. This in turn will result in regular investments to boast the economy and help support the growth of activities in the market in general. By doing so the ideal funds will be utilized in the best way, which otherwise would have generated only a marginal interest. Financial intermediaries who match the lender with the borrower help both by reducing their transaction costs. They also provide in-depth information to their clients to provide them with the best available source of investing their money. Information costs are substantially costs are reduced for both parties, namely the lender and the borrower, since they don’t have to spend resources from their own end to dig out extensive information. ...
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