Introduction to Finance

savings and loan associations 
(S&Ls) 
accept individual savings 
and lend pooled savings to 
individuals, primarily in the form of 
mortgage loans, and businesses
credit unions 
cooperative, 
nonprofi t organizations that exist 
primarily to provide member 
depositors with consumer credit
Business
Firms
Purchase debt and equity securities
Make loans and purchase debt securities
Make deposits
Purchase shares
Purchase securities
Pay premiums
Make contributions
Mutual
Funds
Commercial
Banks
Investment
Banks and
Brokerages
Individual
Savers and
Investors
Pension
Funds
Insurance
Companies
FIGURE 3.2
Role of Financial Institutions in Directing Savings to Business Firms

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C H A PT E R 3 Banks and Other Financial Institutions
purchase the debt and equity securities of business fi rms, as is depicted in Figure 3.2. Of 
course, contractual savings organizations also actively purchase the debt securities issued by 
governmental units. 
Insurance companies
provide fi nancial protection to individuals and 
businesses for life, property, liability, and health uncertainties. Policyholders pay premiums 
to insurance companies that invest these funds until the insured claims must be paid. Life 
insurance provides economic security for dependents in the event of premature death of the 
insured individual. Health insurance provides protection against possible catastrophic medical 
expenses in the event the insured individual becomes ill or is in an accident. Property insur-
ance protects a policyholder against possible fi nancial loss from fi re, theft, and other insured 
perils. Liability insurance protects a policyholder against possible fi nancial loss from a claim 
of negligence charged by another individual.