Question

Provide a general historic description of the predominant source and use of funds for commercial banks.

Provide a general historic description of the predominant source and use of funds for insurance companies.

Explain why/how contributions to pension plans are often considered less risky than contributions to mutual funds.

How is the purpose of a finance company different from a thrift?

1. Explain Maturity intermediation performed by Financial Institutions in general terms.

Answer 1

SOLUTION:

(a) The source of funds used by the commercial banks are done through collection of deposits, reserves and surplus , borrowings from other commercial banks. Predominant sources like investments, fixed assets and other assets, cash in hand and balance with RBI, Loans and advances at last but not least money at call and short notice.

(b) The sources of funds used by the insurance companies done through owe the money from the policy holders. rest of others In the form of investments like gold, bonds, stocks, government securities.

(c) The pension risk plans are normally defined by Earnings per share of the company. Because they are done the investments for the long term perspective only. But in case of mutual funds they are also investing in same sort of companies only but they have done through portfolio managers to diversify the risk through various segments like Futures and option.

(d) Normally finance companies activity is lending finance to various business activities for long term purpose. In thrift it defines is saving money. So in long term perspective in finance companies are require to not only lending activities it can also accept deposits.

(e) Maturity intermediation means accepting deposits for long term and lending finance for short term because of (arbitrage) taking interest rate advantage. The rate of interest difference between long term and short term