Caleb ~('\" ' Kush Project "8 Caleb ~(" is typing... 24 PART1 Financial Institutions program. As long as the policy is in force, the policy accumulates cash value, which is the savings component of the policy. Many savers find such policies attractive because the periodic payments assure them of insurance plus a savings program. Others find them unattractive because the interest rate paid on the savings may be less than can be earned on alternative investments. Life insurance companies use the proceeds from the policies to acquire incomeaearning assets. While life insurance companies compete with commercial banks for granting loans, they serve different financial markets. Commercial banks stress shortiterm, liquid loans and are a primary source of shortiterm finance. Life insure ance companies, however, do not need to stress shortiterm liquidity. Mortality tables are scientifically constructed. A life insurance company can predict with accuracy the volume of death benefits that the company will have to pay and can construct a port? folio of longiterm assets that meets the forecast benefits. Since longiterm investments tend to earn higher interest rates than shortaterm debt, a life insurance company will seek to have a substantial amount of its funds in these more profitable investments. For example, the value of MetLife's longiterm bond portfolio is almost 27 times the size of its holdings of cash and other shortiterm securities. (The features of these various debt instruments are covered in Chapter 12.) 2.9 Pension Plans The role of a pension plan is to accumulate assets for workers so that they will have funds for retirement. Funds are periodically put in the pension plan by the saver, the employer, or both. The money deposited with the fund then is used to purchase incomeiearning assets. The saver's funds grow over time as additional contributions are paid into the pension plan, and the funds already in the plan earn income and appreciate in value. Many pension plans exist, but few of them really perform the function of finane cial intermediaries. Many pension plans do not invest or lend the money directly to borrowers. Instead they may purchase existing securities, such as the stock of IBM; that is, the pension plan participates in the secondary, not the primary, market for securities. For a pension plan to serve as a financial intermediary, it must pass the funds directly to a borrower or invest them directly in a firm. This distinction between pension plans may be illustrated by the pension plans used by many colleges and universities for their employees. Funds may be contributed by both the employer and the employee to the Teachers Insurance and Annuity Asso* ciation (TIAA) or to the College Retirement Equity Fund (CREF). The actual dollar amount of the contribution varies with the school and the employee's salary. The funds may be contributed to either plan or may be split between the two plans. CREF primarily purchases existing corporate stock. Money that flows into CREF does not go to the companies that issued the stock. Instead, the money goes to the seller of the stock, who may have purchased the shares many years ago. TIAA purchases an entirely different type of portfolio that stresses debt, especially morte gages. In this case funds are transferred from savers to borrowers, and the pen? sion plan is acting as a financial intermediary. It creates a claim on itself when it receives the savers' funds, and it receives a claim from borrowers when the funds are lent to finance purchases. The transfer of purchasing power from saver to borrower by an intermediary that creates claims on itself is the role of a financial intermedie ary. Hence, TIAA is an example of a pension plan that does serve as a financial intermediary. Copyiiqiii 2m 9 Cenqage Leaming All Rights Resewed May not be Copled. scanned or duplicated in whole or iii part ch 0272007203 Cupynglu mmmm: Lem-imp, All mm. Rtunrd MN ml hemmed. uunnnl ()rduvllmltil ii. whule M iii ...n 1mm elmlnwm Eighth. m lhml pmy Lumrnl um m wppnummmim {Bank "in alum-ml mm.\" mm in. my WWW cumml .imm maul\" Hiram: mun learning \"pg...\" cum tuning mm. is: ugh! immm alumna rim-mi :n myiim irmmqmi \"w