Question

Explain why the following statement is true, "money is an asset but not all assets are money."

Explainhow financial intermediariesin crease the efficiencyof an economy.

What are the four fundamental characteristics that determine the value of afinancial instrument

Answer 1

An important function of money is that it is a medium of exchange. We can walk into any shop and give money in exchange for goods. Assets are all not liquid. For example, a house is an asset and we cannot give an house in exchange for goods.

Financial intermediaries, like commercial banks, investment banks, mutual funds, who act as a middleman between those who have surplus funds (i.e. lenders) and those who need funds (i.e. borrowers). The financial intermediaries channel funds to those who need them, diversifying risk and at the minimum transaction cost. These intermediaries have perfect information of the financial markets and can perform at the lowest cost.

Four fundamental characteristics of a financial instruments:

Size: Larger payments are more valuable than smaller payments

Time: Earlier payments are more valuable than later ones.

Certainty: Payments that are certain to be paid are more valuable

Circumstances: Payments that are received when needed are more valuable.