Chapter 22, Problem 2FRQ

To determine

The four most important types of financial intermediaries.

Explanation of Solution

The four most important types of financial intermediaries include banks, mutual funds, pension funds, and life insurance companies that can be explained as follows:

1. Bank: A bank is the major financial intermediary that delivers liquid assets in the form of bank deposits to lenders and accepts the deposits for further lending. This intermediary uses these deposited funds to finance other borrowers who want to invest or need investment spending on liquid assets.
2. Mutual funds: By purchasing or holding a share in any company, these intermediaries create a stock portfolio and after purchasing these shares, this intermediary sells shares of the stock portfolio to other individual investors in the market. This intermediary is preferable for individuals who do not have adequate or enough amount of money to invest. But it causes diversification achievement because there is a high transaction cost.
3. Pension fund: It is a nonprofit institution or intermediary that invests in the savings of its members and then provides income or pension benefits to its members when they retire. This is the best intermediary to plan future savings.
4. Life insurance company: A life insurance company deals with the selling of policies by ensuring the guaranteed payment to a policyholder's beneficiaries at the time of the policyholder's death and offering benefits to policyholders from financial hardships.

Economics Concept Introduction

Introduction: Financial system refers to a set of financial institutions or financial intermediaries that offers the exchange of funds, insurance, and deposits such as banks, insurance companies, etc.