Savers May Prefer to Use Financial Intermediaries Rather Than Lending

question 59

Multiple Choice

Savers may prefer to use financial intermediaries rather than lending directly to borrowers because financial intermediaries:

• A)reduce the cost of gathering information about borrowers.
• B)have a monopoly on lending.
• C)increase the risk of lending.
• D)offer higher rates of return than available elsewhere.

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Definitions:

Cost of Capital

The rate of return that a company must earn on its investment projects to maintain its market value and attract funds, including the cost of debt and the cost of equity.

Discount Rate

The Discount Rate is the interest rate that the Federal Reserve charges commercial banks for overnight loans. It influences liquidity and borrowing costs in the banking system.

WACC

Weighted Average Cost of Capital; a calculation of a firm's capital costs, weighted according to the proportion of equity and debt in the firm's capital structure.

Negative Net Present Value

An indication that the projected earnings (discounted back to present value) of an investment will be less than the initial investment cost.