Risk intermediation

o Risk intermediation. The SSUs do not bear
risc o eau1t tjioripayment o principal or interest) by DSUs. The secondary securities issued to the SSU are backed by the financial strength of the intermediary (and, in the case of federally insured deposits, by the federal government).
o Information intermediation. The SSUs do not need to research all projects in which they ultimately invest. Investors, instead, rely on the management skill and financial position of the intermediary.
5. a. High interest rates of the late 1970s and
early l9BOs made bank loans an expensive
source of short—term financing for
nonfinancial corporations.
b. The use of commercial paper has made it
possible for large, creditworthy firms to
obtain short-term financing directly from
investors. A shift from indirect financing
(bank loans) to direct financing (commercial
paper) enables firms to realize a significant
savings——represented by the difference between
the prime rate and the commercial paper rate.
c. Investment bankers help firms to float issues
of commercial paper in primary (original
issue) markets.
6. Commercial banks, savings and loan associations,
mutual savings banks, and credit unions are all
depository institutions. Depository institutions
accept funds from the public and promise a specific
rate of return. In most cases, the deposits
themselves (secondary securities) are insured (with
some limitations) by a government—sponsored agency.
7. a. Investment companies issue shares of stock which entitle shareholders to rates of return that vary with the investment experience of the company’s asset portfolio.
b. Pension funds offer the promise of deferred income during retirement.