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A financial intermediary stands between savers (who have surplus funds) and borrowers or investors (who need funds). It earns a spread or fee for performing this matching role and for bearing risks on behalf of its clients.
Key types: - Banks: accept deposits and make loans. The interest rate on loans exceeds the rate on deposits — the spread is the bank's gross income. - Insurance companies: collect premiums, pool policyholder risk, and invest float in long-dated assets. Policyholders get protection; the insurer earns investment returns on premiums held until claims arise. - Pension funds: pool retirement savings from employees and invest them in equities, bonds, and property over decades, aiming to generate returns that meet future pension obligations. - Mutual funds: pool retail investor money to buy a diversified portfolio. Investors own proportional shares of the fund. Professional management + diversification for amounts too small to achieve it individually.
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Eliminate any option that contradicts something stated directly in the lesson, then check which one actually follows from the rule you just learned. Tell me which option confused you and I'll point to the exact line.
Exam strategy
Central bank tools (reserve ratio, discount rate, open-market ops) affect money supply and interest rates in opposite directions.
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