ACCA Financial Management (F9) Certification Practice Exam

What is the primary function of financial intermediaries?

1. They impose higher prices on goods

2. They connect providers and users of finance

3. They directly issue new securities

4. They manage currency exchange rates

The correct answer is: They connect providers and users of finance

The primary function of financial intermediaries is to connect providers and users of finance. Financial intermediaries, such as banks, credit unions, and investment firms, play a crucial role in the financial system by facilitating the flow of funds between savers (those who have surplus funds) and borrowers (those who need funds). They collect deposits from individuals and institutions, pool these funds, and then allocate them to various investments, loans, or other financial products. By performing this matching function, financial intermediaries not only provide essential liquidity to the economy but also help reduce transaction costs and risks for both parties. For example, a bank can diversify its loan portfolio, mitigating risks that individual lenders might not be able to manage effectively on their own. In this context, the other options do not correctly capture the primary role of financial intermediaries. Imposing higher prices on goods does not reflect their primary function, as that pertains more to market dynamics rather than the intermediary role. While financial intermediaries may facilitate the issuance of new securities indirectly, they are not typically responsible for directly issuing them. Currency exchange management is a specialized function that may be part of certain financial operations but does not represent the core characteristic of financial intermediaries as a whole. Thus, the correct answer