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 All five statements are correct One statement is correct Four statements are correct Three statements are correct Two statements are correct ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

Let's evaluate each statement about intermediated financing arrangements one by one, using fundamental finance concepts to distinguish between direct and intermediated financing.
Option 1: All five statements are correct. This would require every listed statement to be true. However, I is generally false in modern finance because users of funds typically obtain financing through intermediaries (like banks and financial markets) rather than directly from money and capital markets in all cases. II is also false since many instruments are issued through intermediaries or with intermediary involvement; direct issuance between savers and borrowers is not the norm in the presence of financial intermediaries. IV is questionable because intermediation usually lowers borrowers' costs and increases access to funding, not the opposite. V is false because intermediaries are designed to reduce search and information costs for savers. Based on these quick checks, not all five can be correct.
Option 2: One statement is correct. This option claims that exactly one of the five statements is true. To assess this, we test each statement for truthfulness. III describes a commercial bank standing between savers and borrowers with two separate contractual agreements (a loan agreement with the borrower and a deposit/contract with the savers). This is a classic description of intermediation: the bank accepts deposits and makes loans, involving two distinct contracts. The other statements (I, II, IV, V) run counter to standard understanding of intermediation and the costs/benefits of using intermediaries, as noted above. If indeed only III is true, that would make the statement “One statement is correct” accurate in content.
Option 3: Four statements are correct. If this were the case, three of I, II, IV, V would also need to be true alongside III. However, as previously discussed, I and II describe direct funding relationships that are not generally accurate in economies with intermediated financing, and V describes higher search costs (the opposite of what intermediaries achieve). This makes four correct unlikely.
Option 4: Three statements are correct. This would require exactly two of I, II, IV, V to be true in addition to III. Given the standard roles of intermediaries, I and II are not true in the traditional sense, and V is also inconsistent with the function of intermediaries. So having three true statements does not align with the typical interpretation of intermediation.
Option 5: Two statements are correct. Similar to the above, selecting two true statements would imply more than one of I, II, IV, V is true, which conflicts with the conventional understanding that those statements are either false or mischaracterize intermediation.
Overall, the analysis of each option shows that the statements that align with standard intermediation theory point to III as the sole correct statement, whereas the others contradict core concepts of how intermediaries operate, their costs, and the nature of direct vs. intermediated financing.

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