17.2 How Households Supply Financial Capital

We can categorize all investments according to three key characteristics: average expected return, degree of

risk, and liquidity. To obtain a higher rate of return, an investor must typically accept either more risk or less

liquidity. Banks are an example of a financial intermediary, an institution that operates to coordinate supply

and demand in the financial capital market. Banks offer a range of accounts, including checking accounts,

savings accounts, and certificates of deposit. Under the Federal Deposit Insurance Corporation (FDIC), banks

purchase insurance against the risk of a bank failure.

A typical bond promises the financial investor a series of payments over time, based on the interest rate at the

time the financial institution issues the bond, and when the borrower repays it. Bonds that offer a high rate of

return but also a relatively high chance of defaulting on the payments are called high-yield or junk bonds. The
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