Current Attempt in Progress Direct financing occurs when:
A a borrower-spender borrows from the federal government.
B a lender-saver borrows from the federal government.
C a borrower-spender borrows directly from a lender-saver.
D a lender-saver borrows directly from a borrower-spender.
The correct answer and explanation is:
The correct answer is:
C) a borrower-spender borrows directly from a lender-saver.
Direct financing refers to a situation where borrowers and lenders engage directly in financial transactions without any intermediary, such as a bank or financial institution. In this case, the borrower-spender (someone who needs funds for consumption or investment) directly approaches a lender-saver (someone who has surplus funds to lend). The borrower receives funds, typically in the form of loans or bonds, from the lender, who expects repayment with interest.
In direct financing, there is no middleman. This type of financing is common in markets where borrowers issue bonds directly to investors, or where companies and individuals can obtain loans or funds directly from other individuals or entities without using financial intermediaries. This contrasts with indirect financing, where a borrower gets funds through financial intermediaries like banks or other institutions that match savers and borrowers.
The process benefits both parties in certain ways. Borrowers may be able to access funds at potentially lower interest rates since they are avoiding the additional costs associated with intermediaries. Lenders, on the other hand, may earn higher returns compared to depositing their funds with an intermediary. However, there are risks for both parties in direct financing, such as default risk for lenders and higher costs or lack of diversification for borrowers. Nonetheless, it remains a crucial aspect of financial markets, particularly for large institutions or governments seeking to bypass intermediaries to raise funds.