Will Computer Technology Cause Financial Intermediaries to Become Extinct?
Group Assignment 1 GD20503 Financial Markets and Institutions Please select ONE of the following issues for your group assignment. You are required to provide your opinion on the selected issue using relevant reading materials. These materials can be obtained from academic journal articles, research papers, working papers, economic reports, books and media stories. A copy of these materials indicating the source and the date is also to be submitted with the assignment.
Issue 1: Will Computer Technology Cause Financial Intermediaries to Become Extinct? POINT: Yes. Financial intermediaries benefit from access to information. As information becomes more accessible, individuals will have the information they need before investing or borrowing funds. They will not need financial intermediaries to make their decisions. COUNTER-POINT: No. Individuals rely not only on information, but also on expertise. Some financial intermediaries specialize in credit analysis so that they can make loans.
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Surplus units will continue to provide funds to financial intermediaries rather than make direct loans, because they are not capable of credit analysis, even if more information about prospective borrowers is available. Some financial intermediaries no longer have physical buildings for customer service, but they still require people who have the expertise to assess the creditworthiness of prospective borrowers. WHO IS CORRECT? Use relevant reading materials to learn more about this issue. Offer your own opinion on this issue.
Issue 2: Does a Large Fiscal Budget Deficit Result in Higher Interest Rates? POINT: No. In some years (such as 2003), the fiscal budget deficit was large and interest rates were very low. COUNTER-POINT: Yes. When the federal government borrows large amounts of funds, it can crowd out other potential borrowers, and the interest rates are bid up by the deficit units. WHO IS CORRECT? Use relevant reading materials to learn more about this issue. Offer your own opinion on this issue. Issue 3: Should a Yield Curve Influence a Borrower’s Preferred Maturity of a Loan?
POINT: Yes. If there is an upward-sloping yield curve, a borrower should pursue a short-term loan to capitalize on the lower annualized rate charged for a short-term period. The borrower can obtain a series of short-term loans rather than one loan to match the desired maturity. COUNTER-POINT: No. The borrower will face uncertainty regarding the interest rate charged on subsequent loans that are needed. An upward-sloping yield curve would suggest that interest rates will rise in the future, which will cause the cost of borrowing to increase.
Overall, the cost of borrowing may be higher when using a series of loans than when matching the debt maturity to the time period in which funds are needed. WHO IS CORRECT? Use relevant reading materials to learn more about this issue. Offer your own opinion on this issue. Assignment Format: 1. 2. 3. 4. Length of the assignment: must not exceed 2000 words Font size: 11 (Tahoma) Double spacing Margin: Paper Size is A4; 1” left; 1” right; 1” top; and 1” bottom Date of Submission: 6 November 2012 Please note that plagiarism is a serious offence