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Finally, even though real-world financial markets provide some liquidity services
by allowing households to trade corporate debt and equity securities among themselves, investors also face a price risk on sale of securities, and the secondary market
trading of securities involves various transaction costs. That is, the price at which
household investors can sell securities on secondary markets such as the New York
Stock Exchange may well differ from the price they initially paid for the securities.
Because of (1) monitoring costs, (2) liquidity costs, and (3) price risk, the average
household saver may view direct investment in corporate securities as an unattractive
proposition and prefer either not to save or to save in the form of cash.
However, the economy has developed an alternative and indirect way to channel
household savings to the corporate sector. This is to channel savings via FIs. Due to the FIGURE 1–1
Flow of Funds in a
World without FIs Equity and debt claims
(net savers) Corporations
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- Spring '09