【正文】 ous services to sectors of the economy? First, FIs collect and process information more efficiently than individual savers. Second, FIs provide secondary claims to household savers which often have better liquidity characteristics than primary securities such as equities and bonds. Third, by diversifying the asset base FIs provide secondary securities with lower pricerisk conditions than primary securities. Fourth, FIs provide economies of scale in transaction costs because assets are purchased in larger amounts. Finally, FIs provide maturity intermediation to the economy which allows the introduction of additional types of investment contracts, such as mortgage loans, that are financed with shortterm deposits. 8. How do FIs solve the information and related agency costs when household savers invest directly in securities issued by corporations? What are agency costs? Agency costs occur when owners or managers take actions that are not in the best interests of the equity investor or lender. These costs typically result from the failure to adequately monitor 4 the activities of the borrower. If no other lender performs these tasks, the lender is subject to agency costs as the firm may not satisfy the covenants in the lending agreement. Because the FI invests the funds of many small savers, the FI has a greater incentive to collect information and monitor the activities of the borrower. 9. What often is the benefit to the lenders, borrowers, and financial markets in general of the solution to the information problem provided by the large financial institutions? One benefit to the solution process is the development of new secondary securities that allow even further improvements in the monitoring process. An example is the bank loan that is renewed more quickly than longterm debt. The renewal process updates the financial and operating information of the firm more frequently, thereby reducing the need for restrictive bond covenants that may be difficult and costly to implement. 10. How do FIs alleviate the problem of liquidity risk faced by investors who wish to invest in the securities of corporations? Liquidity risk occurs when savers are not able to sell their securities on demand. Commercial banks, for example, offer deposits that can be withdrawn at any time. Yet the banks make longterm loans or invest in illiquid assets because they are able to diversify their portfolios and better monitor the performance of firms that have borrowed or issued securities. Thus individual investors are able to realize the benefits of investing in primary assets without accepting the liquidity risk of direct investment. 11. How do financial institutions help individual savers diversify their portfolio risks? Which type of financial institution is best able to achieve this goal? Money placed in any financial institution will result in a claim on a more diversified portfolio. Banks lend money to many different types of corporate, consumer, and government customers, and insurance panies have investments in many different types of assets. Investment in a mutual fund may generate the greatest diversification benefit because of the fund’s investment in a wide array of stocks and fixed ine securities. 12. How can financial institutions invest in highrisk assets with funding provided by lowrisk liabilities from savers? Diversification of risk occurs with investments in assets that are not perfectly positively correlated. One result of extensive diversification is that the average risk of the asset base of an FI will be less than the average risk of the individual assets in which it has invested. Thus individual investors realize some of the returns of highrisk assets without accepting the corresponding risk characteristics. 13. How can individual savers use financial institutions to reduce the transaction costs of investing in financial assets? 5 By pooling the assets of many small investors, FIs can gain economies of scale in transaction costs. This benefit occurs whether the FI is lending to a corporate or retail customer, or purchasing assets in the money and capital markets. In either case, operating activities that are designed to deal in large volumes typically are more efficient than those activities designed for small volumes. 14. What is maturity intermediation? What are some of the ways in which the risks of maturity intermediation are managed by financial intermediaries? If borrowers and lenders have different optimal time horizons, FIs can service both sectors by matching their asset and liability maturities through on and offbalance sheet hedging activities and flexible access to the financial markets. For example, the FI can offer the relatively shortterm liabilities desired by households and also satisfy the demand for longterm loans such as home mortgages. By investing in a portfolio of longand shortterm assets that have variable and fixedrate ponents, the FI can reduce maturity risk exposure by utilizing liabilities that have similar variable and fixedrate characteristics, or by using futures, options, swaps, and other derivative products. 15. What are five areas of institutionspecific FI specialness, and which types of institutions are most likely to be the service providers? First, mercial banks and other depository institutions are key players for the transmission of moary policy from the central bank to the rest of the economy. Second, specific FIs often are identified as the major source of finance for certain sectors of the economy. For example, Samp。Ls and savings banks traditionally serve the credit needs of the residential real estate market. Third, life insurance and pension funds monly are encouraged to provide mechanisms to transfer wealth across gen