Question3 How many of the following statements are correct in regards to intermediated financing arrangements? I. Users of funds obtain financing directly from money and capital marketsII. Financial instruments are issued directly between savers and borrowersIII. A commercial bank stands between savers and borrowers, with two separate contractual agreementsIV. Borrowers avoid the costs of intermediation and have increased flexibility in issuing securitiesV. There are higher search costs for suppliers of funds Three statements are correct Four statements are correct One statement is correct Two statements are correct All five statements are correct ResetMaximum marks: 1 Flag question undefined

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Question: How many of the following statements are correct in regards to intermediated financing arrangements? I. Users of funds obtain financing directly from money and capital markets II. Financial instruments are issued directly between savers and borrowers III. A commercial bank stands between savers and borrowers, with two separate contractual agreements IV. Borrowers avoid the costs of intermediation and have increased flexibility in issuing securities V. There are higher search costs for suppliers of funds

Option I: 'Users of funds obtain financing directly from money and capital markets.' In an intermediated financing framework, financing typically flows through financial intermediaries (e.g., banks, mutual funds), rather than directly from savers to borrowers. This statement describes direct finance, not intermediation, so it is incorrect.

Option II: 'Financial instruments are issued directly between savers and borrowers.' Direct issuance of securities between savers and borrowers sounds like direct finance. Under intermediated financing, instruments are often issued to the intermediary, who then lends to the borrower, so this statement is incorrect as a general description of intermediation.

Option III: 'A commercial bank stands between savers and borrowers, with two separate contractual agreements.' This captures the essence of bank-based intermediation: savers deposit funds with the bank (deposit contract) and the bank lends to borrowers (loan contract), creating two distinct contracts. This statement is correct.

Option IV: 'Borrowers avoid the costs of intermediation and have increased flexibility in issuing securities.' The purpose of intermediation is to reduce costs and provide screening and liquidity services; borrowers typically incur intermediation costs or benefit from the services of intermediaries rather than avoid them. Therefore this statement is incorrect as a general description of intermediation.

Option V: 'There are higher search costs for suppliers of funds.' Intermediation reduces search and screening costs for savers by pooling and evaluating risks, so this statement is incorrect in the context of intermediation.

Summary of each option:
- I is incorrect because intermediation involves channels through financial intermediaries rather than direct market access.
- II is incorrect for the same reason; it describes direct issuance, not intermediary-based issuance.
- III is correct because a commercial bank typically sits between savers and borrowers, creating two contracts (deposit and loan).
- IV is incorrect since intermediation usually adds costs for borrowers or replaces them with intermediary services; it does not eradicate costs while increasing flexibility in issuing securities.
- V is incorrect since intermediation lowers search costs for fund suppliers by leveraging the intermediary’s screening and aggregation processes.

Conclusion: Among the five statements, only III is correct. The option corresponding to this conclusion is the one labeled as 'One statement is correct.'

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