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How do these functions benefit the economy second we

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Unformatted text preview: How do these functions benefit the economy? Second, we investigate what makes some FIs more special than others. Third, we look at how unique and long-lived the special functions of FIs really are. 1 Some public utility suppliers such as gas, electric, telephone, and water companies are also singled out for regulation because of the special nature of their services and the costs imposed on society if they fail. sau86198_ch01.qxd 4 Part One 4/21/02 8:52 PM Page 4 Introduction Financial Intermediaries’ Specialness Covenant Legal clauses in a bond contract that require the issuer of bonds to take or avoid certain actions. Liquidity The ease of converting an asset into cash. Price Risk The risk that the sale price of an asset will be lower than the purchase price of that asset. To understand the important economic function of FIs, imagine a simple world in which FIs do not exist. In such a world, households generating excess savings by consuming less than they earn would have the basic choice: They could hold cash as an asset or invest in the securities issued by corporations. In gener...
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