Introduction to Finance

savings-investment 
process 
involves the direct or 
indirect transfer of individual 
savings to business fi rms in 
exchange for debt and equity 
securities of the fi rm
Savers
Business Firm
Direct Transfers
Securities
Money
Savers
Business Firm
Indirect Transfers
(through an investment banking firm)
Securities
Money
Securities
Money
Savers
Business Firm
Investment
Banking Firm
Financial
Institution
Indirect Transfers
(through a financial intermediary)
Money
Money
Firm’s
Securities
Institution’s
Securities
FIGURE 2.1
Savings-Investment Process: From Individual Savers to a Business Firm

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2.3 Overview of the Monetary System
25
securities directly to savers who might be individuals, business fi rms, or fi nancial institutions. 
Indirect transfers also could take place with the aid of fi nancial institutions to facilitate the 
movement of government entity debt securities to savers. A fi nancial institution may oper-
ate as a conduit in the primary securities market. Alternatively, the fi nancial institution may 
purchase the government entity’s debt securities and, in turn, issue its own debt securities to 
individuals and other savers.
The savings-investment process could also focus on moving the savings of individuals 
and other savers to those individuals, businesses, institutions, and governments that want to 
fi nance real estate investments. Many individuals want to own their own homes and can do so 
only by taking on mortgage debt or home loans. Other organizations also may wish to invest 
in real property in the form of offi
ces, manufacturing facilities, or other buildings. Doing so 
often requires the need to fi nance a part of the purchase price with a mortgage loan on the real 
property being purchased. While our focus in this text is primarily on the savings-investment 
process involving the raising of money or fi nancial capital by business fi rms, the process for 
fi nancing defi cits by government entities will be discussed in Chapter 5, and the fi nancing of 
residential and commercial property will be addressed in Chapter 7.
2.3
Overview of the Monetary System
The monetary system is responsible for carrying out the fi nancial functions of creating and 
transferring money. Money is needed to conduct day-to-day activities, facilitate the capital 
investment process, and support economic growth. Businesses need money to invest in inven-
tories, equipment, and buildings. Governments need money to construct roads, buildings, 
parks, and other infrastructure for the people. Individuals need money to purchase goods, 
services, and homes.