Week 1 - SSUs and DSUs Flashcards
What is an SSU?
Surplus Spending Unit - someone with excess money available to invest in a financial instrument
What is a DSU?
Deficit Spending Unit - someone with insufficient funds for their operations.
What is a financial intermediary?
A provider of funds who raises them from others OR does not use the income generated by the instrument.
What is Direct Finance?
When SSUs hold as an asset the financial instrument that has been issued by the DSUs.
What type of instrument makes Direct Finance possible and why?
A security because they are standardized products with a formal market in which many identical securities are traded.
Are commercial banks involved in Direct Finance?
Yes, CBs are necessarily involved in any transactions when funds transferred takes the form of deposits in CBs. THEY ARE NOT INTERMEDIARIES IN THIS INSTANCE
Can Investment Banks be involved in Direct Finance?
Yes, an investment bank will most likely help DSUs organise the issue of securities in the primary market.
Can brokers be involved in Direct finance?
Yes, they will usually assist the SSU to buy the instruments.
What is the most common method of Direct finance?
When a household owns company shares.
What is Indirect Finance?
When the fin instrument issued by a DSU is held as an asset by a Financial Institution.
Describe the balance sheet activity for financial intermediation with only one intermediary.
SSU: Assets (Bank Deposits) Decrease Assets (Fin Instrument A) Increase Intermediary: Assets (Fin Instruments B) Increase Assets (Bank Deposits) Increase/Decrease Liabilities (Fin Instruments A) Increase DSU: Assets (Bank Deposits) Increase Liabilities (Fin Instrument A) Increase
What is the benefit of indirect finance for DSUs and SSUs?
DSUs and SSUs have opposing needs. DSUs need large amounts of funds for long time periods. SSUs usually only want to invest small amounts of money. For Direct finance, both parties are bound by the same instrument and thus both needs cannot be met. For Indirect finance, two separate instruments bind each party to the intermediary so they can better suit their needs.
