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Unformatted text preview: price-risk protection and liquidity services.
The maturity and return characteristics of the financial claims issued by mutual
funds closely reflect the maturities of the direct equity and debt securities portfolios in
which they invest. In contrast, banks, thrifts, and insurance companies have lower correlations between their asset portfolio maturities and the promised maturity of their
liabilities. Thus, banks may partially fund a 10-year commercial loan with demand deposits; a thrift may fund 30-year conventional mortgages with three-month time deposits; and a life insurance company may fund the purchase of 30-year junk bonds
with a 7-year fixed-interest guaranteed investment contract (GIC).20
To the extent that the financial services market is efficient and these trends reflect the
forces of demand and supply, they indicate a current trend: Savers increasingly prefer investments that closely mimic diversified investments in the direct securities markets over
the transformed financial claims offered by traditional FIs. This trend may also indicate
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This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.
- Spring '09