Lecture 3

Question 1

Financial intermediation = ?

Answer 1

The process by which savings are accumulated in depository institutions and then lent or invested

Question 2

What are the 4 financial institutions categories?

Answer 2

Depository institutions
Contractual savings institutions
Securities firms
Finance firms

Question 3

What do depository institutions do?

Answer 3

Accept deposits/savings from individuals

Then lend pooled deposits to businesses, governments and individuals

Question 4

What are examples of depository instituons?

Answer 4

Commercial banks

thrift institutions (savings banks, savings & loan associations, credit unions)

Question 5

What are commercial banks?

Answer 5

Depository institutions that accept deposits, issue check-writing accounts, and make loans to businesses and individuals

Question 6

What are thrift institutions?

Answer 6

Noncommercial bank depository institutions that accumulate individual savings and primarily make consumer and mortgage loans

Question 7

What do savings banks do?

Answer 7

accept the savings of institutions & lend pooled savings to individuals mainly in the form of mortgage loans

Question 8

What do savings & loan associations (S&Ls) do?

Answer 8

S&Ls accept individual savings and lend pooled savings to individuals (primarily as mortgage loans) and businesses

Question 9

What do credit unions do?

Answer 9

Cooperative nonprofit organisations that exist primarily to provide member depositors with consumer credit

Question 10

Consumer credit = ?

Answer 10

allows consumers to borrow money or incur debt

Question 11

What are contractual savings organisations?

Answer 11

Organisations collect premiums and contributions from participants and provide insurance against major financial losses & retirement

Use the pooled funds to purchase debt and equity securities of business firms

Question 12

What are examples of contractual savings organisations?

Answer 12

Insurance companies

Pension funds

Question 13

What are insurance companies?

Answer 13

Provide financial protection to individuals and businesses for life, property, liability and health uncertainties

Question 14

What are pension funds?

Answer 14

Receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees

Question 15

What do securities firms do?

Answer 15

Accept and invest individual savings and also facilitate the transfer of existing securities between investors

Question 16

What are examples of securities firms?

Answer 16

Investment companies
Investment banking firms
Mutual funds
Brokerage firms

Question 17

What are investment companies?

Answer 17

They sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities

Question 18

What are mutual funds?

Answer 18

Open-end investment companies that issue unlimited shares to investors & use pooled proceeds to purchase corporate & government securities

Question 19

What do investment banking firms do?

Answer 19

Sell or market new securities issued by businesses to individuals and institutional investors

Question 20

What do brokerage firms do?

Answer 20

Assist individuals to purchase new or existing securities or sell previously purchased sexurities

Question 21

What are finance firms?

Answer 21

They provide loans directly to consumers and businesses

Question 22

What are finance companies?

Answer 22

They provide loans directly to consumers and businesses

Question 23

What are mortgage banking firms?

Answer 23

They originate mortgage loans on homes and other real property by bringing together borrowers and institutional investors

Question 24

What are examples of finance firms?

Answer 24

Finance companies

Mortgage banking firms

Question 25

What are the 5 ways that savers and investors can invest via financial institutions?

Answer 25

Making deposits to commercial banks Purchasing shares in mutual funds Purchasing securities at IB firms and brokerages Paying premiums to insurance companies Making contributions to pension funds

Question 26

How are savers’ investments in financial institutions passed onto business firms?

Answer 26

The financial institutions either purchase debt & equity securities from the business firms or make loans and purchase debt securities

Question 27

What do commercial banks do?

Answer 27

Accept deposits, make loans and issue check writing accounts

Question 28

What do investment banks do?

Answer 28

Help businesses sell their securities to raise financial capital

Question 29

What do universal banks do?

Answer 29

Banks that engage in both commercial banking and investment banking activities

Question 30

How do indirect investment transfers via commercial banks work?

Answer 30

Savers pay commercial banks in return for CD’s Commercial banks pay business firms in return for the firms note (a promise to repay the loan)

Question 31

How do indirect investment transfers work via an investment bank?

Answer 31

Savers pay the investment bank for the business firm’s securities The investment bank either buys then resells the business firm’s securities to savers or just markets them to savers