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Unformatted text preview: In fulfilling a brokerage function, the FI
plays an extremely important role by reducing transaction and information costs or imperfections between households and corporations. Thus, the FI encourages a higher
rate of savings than would otherwise exist.
The second function is the asset-transformation function. In acting as an asset
transformer, the FI issues financial claims that are far more attractive to household
savers than the claims directly issued by corporations. That is, for many households,
the financial claims issued by FIs dominate those issued directly by corporations due
to lower monitoring costs, lower liquidity costs, and lower price risk. In acting as asset transformers, FIs purchase the financial claims issued by corporations—equities,
bonds, and other debt claims called primary securities—and finance these purchases
by selling financial claims to household investors and other sectors in the form of deposits, insurance policies, and so on. The financial claims of FIs may be considered
secondary securities because these assets are backed by the primary securities issued
by commercial corporations that in turn invest in real a...
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- Spring '09