Finally even though real world financial markets

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Unformatted text preview: re. 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 Households (net savers) Corporations (net borrowers) Cash sau86198_ch0...
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This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.

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