Qxd 42102 852 pm page 5 chapter 1 figure 12 flow of

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Unformatted text preview: 1.qxd 4/21/02 8:52 PM Page 5 Chapter 1 FIGURE 1–2 Flow of Funds in a World with FIs FI (brokers) Households Cash Deposits and insurance policies Economies of Scale The concept that the cost reduction in trading and other transaction services results from increased efficiency when FIs perform these services. Asset Transformer An FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations. Primary Securities Securities issued by corporations and backed by the real assets of those corporations. Secondary Securities Securities issued by FIs and backed by primary securities. FI (asset transformers) Why Are Financial Intermediaries Special? 5 Corporations Equity and debt Cash costs of monitoring, liquidity, and price risk, as well as for some other reasons explained later, savers often prefer to hold the financial claims issued by FIs rather than those issued by corporations. Consider Figure 1–2, which is a closer representation than Figure 1–1 of the world in which we live and the way funds flow in our economy. No...
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