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

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BlackTom AI · Accepted Answer

Let’s break down each statement to evaluate the role of financial intermediation in intermediated financing arrangements.
Option I: 'Users of funds obtain financing directly from money and capital markets.' In an intermediated system, savers and borrowers typically interact through financial intermediaries such as banks, which channel funds from savers to borrowers. Therefore, obtaining financing directly from money and capital markets is not characteristic of intermediated financing; this statement is false.
Option II: 'Financial instruments are issued directly between savers and borrowers.' Direct issuance between savers and borrowers describes a disintermediated, direct-finance approach. Since intermediated financing relies on intermediaries, this option is false.
Option III: 'A commercial bank stands between savers and borrowers, with two separate contractual agreements.' This captures the classic picture of intermediation: a bank sits between parties, providing contracts such as a deposit agreement with savers and a loan agreement with borrowers, i.e., two distinct contracts. This statement is true.
Option IV: 'Borrowers avoid the costs of intermediation and have increased flexibility in issuing securities.' The essence of intermediation is to reduce search and transaction costs for both savers and borrowers. By bypassing intermediaries, borrowers would generally face higher, not lower, costs and lose some structured financing benefits that banks provide. Thus this statement is false.
Option V: 'There are higher search costs for suppliers of funds.' Intermediation is typically designed to reduce search and information costs for savers who want to supply funds. Therefore claiming higher search costs under intermediated financing contradicts the fundamental role of intermediaries, making this statement false.
With these evaluations, only statement III reflects the true characteristic of intermediated financing, while I, II, IV, and V do not. Given the list of possible counts of correct statements, the option that corresponds to one statement being correct aligns with this assessment. The other counts would require additional statements to be true, which is not supported by the analysis.

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