This preview shows page 1. Sign up to view the full content.
Unformatted text preview: nd by household savers. Money market mutual funds issue shares to household
savers that allow those savers to enjoy almost fixed principal (depositlike) contracts
while often earning interest rates higher than those on bank deposits. Even life insurance companies allow policyholders to borrow against their policies held with the
company at very short notice. The real puzzle is how FIs such as depository institutions
can offer highly liquid and low price-risk contracts to savers on the liability side of
their balance sheets while investing in relatively illiquid and higher price-risk securities issued by corporations on the asset side. Furthermore, how can FIs be confident
enough to guarantee that they can provide liquidity services to investors and savers
when they themselves invest in risky asset portfolios? And why should savers and investors believe FIs’ promises regarding the liquidity of their investments?
The answers to these questions lie in the ability of FIs to diversify away some but
View Full Document
This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.
- Spring '09