| Course | FNCE 4102 Financial Institutions and Markets |
|---|---|
| Week | Week 1 |
| Paper type | Discussion post |
| Length | About 510 words, 3 pages |
| Format | Discussion post, APA 7 citations |
| School | Walden University |
| Program | BS in Business Administration |
| Updated | October 2026 |
Free sample paper for FNCE 4102 Week 1
Week 1 Discussion: Why Financial Intermediaries Exist
Why Savers Rarely Lend Directly to Borrowers: Search Costs, Hidden Information and Mismatched Maturities, and What an Intermediary Does About Each
Three frictions keep most savers from lending directly to the people and businesses that need money: the cost of finding a match, the saver's inability to judge a borrower and the gap between how long the saver wants to lend and how long the borrower needs the money. Financial intermediaries exist mainly because they reduce all three at once, and each friction explains a different part of what a bank or fund actually does all day.
Search cost comes first. Suppose a nurse has $8,000 saved and a bakery owner needs $40,000 for a new oven, repaid over five years. To lend directly, the nurse would have to find this bakery, and four other savers like her, agree on terms with each and collect payments from one another. The time and expense of that search would swamp the interest earned. A bank pools thousands of small deposits and makes the loan in one transaction, then collects the payments itself (Mishkin & Eakins, 2018).
Information asymmetry follows. The bakery owner knows far more about the business's prospects than the nurse can learn at any reasonable cost. Akerlof (1970) showed that when buyers cannot tell good products from bad, they offer prices that drive good sellers away; in lending, the same problem means a saver who cannot tell good borrowers from bad would demand a rate high enough that only risky borrowers would accept. A bank specializes in screening, reviewing tax returns, cash flow and collateral across many borrowers, which spreads the cost of judging over many loans.
Maturity mismatch closes the set. The nurse may need her money back next month for a car repair; the bakery needs it for five years. A bank can promise depositors their money on demand while lending for years, because not every depositor withdraws at once. Diamond and Dybvig (1983) showed that this transformation provides real value to savers, but it also creates the risk of a bank run if many depositors try to withdraw at once.
Which of the three frictions do you think matters most for a small business trying to borrow today, and has technology, such as online lending platforms, reduced it?
Reply to Andrea
Andrea, I like your point that peer-to-peer lending platforms reduce search costs. I wonder whether they have solved the information problem as well, or only moved it. If the platform screens borrowers but does not keep the loans, does it have the same incentive to screen carefully as a bank that holds the loan on its own books?
Reply to Kwame
Kwame, your example of a credit union that lends only to members of one employer is a clever case for the information problem. Members share a workplace, so the credit union learns about a borrower's job stability at almost no cost. The trade-off is concentration: if that employer cuts jobs, many borrowers struggle at once. Do you think the information advantage outweighs that risk?
References
Akerlof, G. A. (1970). The market for "lemons": Quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488-500. https://doi.org/10.2307/1879431
Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3), 401-419. https://doi.org/10.1086/261155
Mishkin, F. S., & Eakins, S. G. (2018). Financial markets and institutions (9th ed.). Pearson.
Reading the FNCE 4102 Week 1 instructions
In Week 1 you explain why financial intermediaries exist. Name the frictions that make direct lending between savers and borrowers difficult, ideally in your opening paragraph. Illustrate each with a short, concrete example rather than a definition alone. Explain how an intermediary such as a bank reduces each friction, citing the course text or another credible source. Close with a question for classmates that asks them to apply the frictions to a current case, such as online lending. Keep the post to about four hundred words. In replies, test whether a classmate's example solves a friction or only moves it somewhere else.
How this FNCE 4102 Week 1 example is built
The post names search cost, information asymmetry and maturity mismatch in its opening. The search cost paragraph shows how many small savers a direct loan would require and how a bank pools them, citing Mishkin and Eakins. The information paragraph applies Akerlof's lemons argument to lending and explains a bank's screening. The maturity paragraph explains why a bank can lend long against demand deposits and cites Diamond and Dybvig on runs. A question asks which friction matters most for small businesses today. The reply to Andrea asks whether lending platforms that do not keep loans screen as carefully, and the reply to Kwame weighs a workplace credit union's information advantage against concentration.
Where the marks sit in the FNCE 4102 Week 1 rubric
Opening posts are judged on whether they identify the main frictions accurately and explain how intermediaries address each. Strong posts give a concrete illustration for every friction and connect each to a specific function of banks or other institutions. Citing the course text and, where useful, a foundational paper such as Akerlof or Diamond and Dybvig shows depth. Posts that list frictions without examples, or describe banks without explaining why they are needed, earn less. A reply scores well when it tests what a classmate claimed, for example whether a new technology removes a friction or simply shifts who bears it. Concise, organized writing suits the discussion format.
Common FNCE 4102 Week 1 mistakes, and how to avoid them
Picture yourself with some savings and a neighbor who needs a loan for a business. List what would make lending directly hard: finding each other, knowing whether the neighbor will repay and wanting your money back sooner than they can return it. Those are the three frictions. For each, ask what a bank does that you could not. Then find a current example, such as a lending app or a credit union, and ask whether it really removes a friction. Common weaknesses are definitions with no example and examples with no friction. Tell us which institution you want to discuss, and we can help frame the post. Keep each friction to a short paragraph, and make sure each one ends by saying what the intermediary actually does about it; that link is where most of the credit sits.
Get a FNCE 4102 Week 1 example written to your instructions
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FNCE 4102 Week 1 questions, answered
Where can I find a free FNCE 4102 Week 1 sample paper?
Read the intermediation post, with the replies to Andrea and Kwame, here at no cost.
What three frictions does the FNCE 4102 Week 1 post name?
Search cost, information asymmetry between saver and borrower and maturity mismatch between what savers and borrowers want.
How does a bank reduce search cost?
By pooling many small deposits into one large loan and collecting the payments itself.
What does Diamond and Dybvig's work add?
It shows that turning demand deposits into long loans creates value but also the risk of a bank run.
What do the replies test?
Whether online lending platforms screen as carefully when they do not keep loans, and whether a workplace credit union's knowledge outweighs its concentration.