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ECS3701 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024 (833935) - DUE 27 September 2024
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ECS3701 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024 (833935) - DUE 27 September 2024
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,ECS3701 Assignment 2 (COMPLETE ANSWERS)Semester 2 2024 (833935) - DUE 27 September
2024 ; 100% TRUSTED Complete, trusted solutions
and explanations.
2.01 Discuss how collateral and indirect finance are used in
explaining the basic facts about financial structure around the
world. [10]
Collateral and indirect finance play significant roles in explaining
the financial structure and how it operates across the world.
Both concepts help illustrate the dynamics between borrowers
and lenders and the mechanisms that reduce risk and facilitate
lending. Here's how they are used to explain the basic facts
about financial structure globally:
1. Collateral in Financial Structure:
Collateral refers to assets that a borrower offers to a lender to
secure a loan. It serves as a form of protection for the lender,
reducing their risk in case the borrower defaults. This concept is
crucial in understanding financial structure because:
Risk Reduction: Collateral helps mitigate the risk for
lenders, making them more willing to provide loans. This is
particularly important in economies with higher default
rates or weaker legal systems.
Lower Interest Rates: When borrowers offer collateral,
they often receive lower interest rates because the risk to
, the lender is diminished. This incentivizes borrowing and
investment, which is crucial for economic growth.
Credit Accessibility: Collateralized loans are a primary way
for small businesses and individuals to gain access to
credit, especially in developing countries where
creditworthiness may be hard to establish. This contributes
to explaining why small and medium enterprises (SMEs)
are a significant part of the financial structure in many
economies.
2. Indirect Finance in Financial Structure:
Indirect finance involves the use of financial intermediaries,
such as banks and other financial institutions, to facilitate the
flow of funds between savers and borrowers. Indirect finance is
a key component of the global financial structure due to its
ability to address issues of information asymmetry and
transaction costs:
Financial Intermediation: Financial intermediaries help
mobilize savings and allocate resources efficiently. They
collect deposits from savers and provide loans to
borrowers, thus facilitating investment and economic
activity.
Information Asymmetry and Transaction Costs: Direct
finance (e.g., issuing stocks or bonds) can be costly for
small firms due to high transaction costs and information
asymmetry (where borrowers have more information
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