Pension Funds

pension funds

Financial institutions that receive payments from employees and invest the proceeds on their behalf.

Pension funds receive payments (called contributions) from employees, and/or their employers on behalf of the employees, and then invest the proceeds for the benefit of the employees. They typically invest in debt securities issued by firms or government agencies and in equity securities issued by firms.

Pension funds employ portfolio managers to invest funds that result from pooling the employee/employer contributions. They have bond portfolio managers who purchase bonds and stock portfolio managers who purchase stocks. Because of their large investments in debt securities or in stocks issued by firms, pension funds closely monitor the firms in which they invest. Like mutual funds and insurance companies, they may periodically attempt to influence the management of those firms to improve performance.

Other Financial Institutions

Other financial institutions also serve as important intermediaries. Savings institutions (also called thrift institutions or savings and loan associations) accept deposits from individuals and use the majority of the deposited funds to provide mortgage loans to individuals. Their participation is crucial in financing the purchases of homes by individuals. They also serve as intermediaries between investors and firms by lending these funds to firms.

Finance companies issue debt securities and lend the proceeds to individuals or firms in need of funds. Their lending to firms is focused on small businesses. When extending these loans, they incur a higher risk that borrowers will default on (will not pay) their loans than is typical for loans provided by commercial banks. Thus they charge a relatively high interest rate.

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