Question

1. Default (Credit) Risk Intermediation
2. Liquidity Intermediation
3. Time (Maturity) Intermediation
4. Information Intermediation
5. Denomination Intermediation
6. Production Intermediation

Which of the six services do you think an investor would be willing to pay the most to a financial intermediary to receive? Which do you think an investor would be willing to pay the least? Explain your selections.

Answer 1

The investor will be willing to pay the most for the default risk intermediation as it is the risk that an investor or lender takes on the chance of the inability of repayment of the borrower on its debt obligations. Hence on default, the complete shock or risk is borne by the investor. So to get some cushion in this type of risk the investor will definitely be willing to pay the most to get a service like that which reduces its exposure towards default risk.

The least an investor would pay is for the denomination intermediation as this service includes referring a small investor to acquire assets that are generally sold in large denominations. This is just facilitating the funds of the investor through financial intermediaries into large denominated assets. For example, Mutual Funds are the denomination intermediation where the Asset Manager gets paid by the investor due to maintainence of fund.