Question

For Each of the following case, explain what service the financial intermediary is providing to savers or borrowers: risk sharing, liquidity, or information.

A. A mutual fund allows savers to purchase shares in a large number of firms.

B. A bank takes in small deposits and makes mortgage loans

C. A life insurance company offers consumers life insurance, auto insurance, and fire insurance.

D. A firm deducts money from its workers' paychecks and contributes the money to a pension fund.

E. An investment bank underwrites a new issues of stock

Answer 1

Answer.

1. Risk sharing.

because a mutual fund which allows savers to purchase shares decreases the risk of investors or savers, which/who if invest directly in stock markets are at higher risks of loss and misinformation than the mutual funds who have a well experienced fund managers to invest in shares and mitigate and reduce the risk of savers.

B.Liquidity.

Because a bank taking deposits and lending to others is liquidating the markets.

C . Risk sharing.

A life insurance companY who offers consumers different products like life insurance, auto insurancE and fire insurance is sharing the risk of its customers by providing a buffer or social security to them when they need it the most.

D. Risk sharing.

A firm which is deducting money from its workers paychecks and contributing to the pension fund is sharing the risk of its workers, as this will provide them pension and social and economic security in their old age, after their retiremenT.

E. Liquidity.

An investment bank issuing New stocks is increasing the liquidity fir its borrowers by increasing its capital by issuing ne stocks.