Question

Discuss diference between Intermediated finance vs Direct finance. Transaction costs and delegated monitoring?

Answer 1

Part 1 : Difference between Intermediated finance and Direct finance.

Meaning of Direct Finance :- Direct finance is a method of finance where borrowers borrow directly from the financial market without using a third party service, such as a financial intermediary. With direct finance, funds flow directly from the lender to the borrower. Direct financing is usually done by borrowers that sell securities and/or shares to raise money and circumvent the high interest rate of financial intermediary (banks).

Meaning of Intermediated Finance :- Intermediated finance is a method of finance where a financial intermediary takes the money from the lender with an interest rate and lends it to a borrower with a higher interest rate. Intermediated finance are also known as indirect finance. With intermediated finance, funds flow from the lender to a financial intermediary who then channels the fund to the borrower.

From the above discussions, it can be said that intermediated finance and direct finance are different in many ways.

Part 2 : Transaction costs and Delegated monitoring

Transaction costs :- Transaction costs include broker's commission and spreads,which are the differences between the price the dealer paid for a security and the price the buyer pays. The transaction costs to buyers and sellers are the payments that banks and brokers receive for their roles.

Delegated Monitoring :- Intermediaries such as Banks act as delegated monitoring and manage the funds that flow from lender to borrower.