Level 45 Level 47
Level 46

Nature of Financial Intermediation


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Adverse Selection
This happens before the transaction
Asymmetric Information
situation when one party doesn't know enough about the other party to make accurate decisions. This creates two kinds of problems:
Collateral
property that is pledged to a lender to guarantee payment in the event that the borrower is unable to make debt payments **this type of debt is secured debt**
Credit risk
possibility that borrower will not meet the scheduled repayments and default on their loan
financial intermediation
the process of funneling funds from saver-lenders to borrowers-spenders through a financial intermediary.
interest rate risk
the risk that a change in interest rates may affect the net worth of a financial intermediary because of a mismatch in the maturity of its assets and liabilities.
money market deposit account (MMDA)
Deposits with limitied checking account privileges that typically pay an interest rate comparable to Treasury bills or other money market instruments.
money market mutual fund
a fund that pools money from small savers to purchase short-term government and corporate securities
moral hazard
the risk that one party to a transaction will engage in behavior that is undesirable from the other party's point of view