How Can a Depository Intermediary Afford to Purchase Long-Term Risky

question 6

Essay

How can a depository intermediary afford to purchase long-term risky direct claims from funds demanders and finance these purchases with safe,liquid,short-term,low-denomination deposits? What can go wrong in this process?

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Definitions:

Mixed Costs

Expenses that have both a fixed and a variable component, changing with the level of production or sales activity but also including a constant element.

Period Costs

Selling and administrative expenses incurred in marketing the product, delivering the product, or managing the company and not directly related to manufacturing the product.

Fixed Costs

Expenses that do not change in total regardless of changes in the volume of goods or services produced or sold.

Variable Costs

Costs that change in proportion to the level of production or business activity, such as raw materials and direct labor costs.