FIN 502 : CHAPTER 6 the life cycle and financial intermediation.docx
Document Summary
Chapter 6 the life cycle and financial intermediation. Recall the basic equation which provides a model of a financial goal. Wn = w0 (1 + k)n + (et ct)(1 + k)n t. In the early stages of the life cycle, consumption is greater than earnings, but as you proceed, earnings is greater than consuming (et ct > 0) The essence of personal planning is arranging to meet the differences in earnings and consumption through borrowing and saving as appropriate. Financial intermediation: process of transferring money from surplus economic units to economic units that have a productive use for the money: takes place between sectors and over time. Surplus units in one period may need more money for productive investments in another period. Surplus units collect interest, or in another legal form, dividends. Four pillars: banks, trust companies, life insurance companies and investment dealers.
