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Many financial institutions directly or indirectly

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Unformatted text preview: ppliers and demanders of various types of funds can make transactions. A third is through private placement. Because of the unstructured nature of private placements, here we focus primarily on financial institutions and financial markets. Financial Institutions Financial institutions serve as intermediaries by channeling the savings of individuals, businesses, and governments into loans or investments. Many financial institutions directly or indirectly pay savers interest on deposited funds; others provide services for a fee (for example, checking accounts for which customers pay service charges). Some financial institutions accept customers’ savings deposits and lend this money to other customers or to firms; others invest 22 PART 1 Introduction to Managerial Finance customers’ savings in earning assets such as real estate or stocks and bonds; and some do both. Financial institutions are required by the government to operate within established regulatory guidelines. Key Customers of Financial Institutions The key suppliers of funds to financial institutions and the key demanders of funds from financial institutions are individuals, businesses, and governments. The savings that individual consumers place in financial institutions provide these institutions with a large portion of their funds. Individuals not only supply funds to financial institutions but also demand funds from them in the form of loans. However, individuals as a group are the net suppliers for financial institutions: They save more money than they borrow. Business firms also deposit some of their funds in financial institutions, primarily in checking accounts with various commercial banks. Like individuals, firms also borrow funds from these institutions, but firms are net demanders of funds. They borrow more money than they save. Governments maintain deposits of temporarily idle funds, certain tax payments, and Social Security payments in commercial banks. They do not borrow funds directly from financial institutions, although by selling their debt securities to various institutions, governments i...
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