Introduction to Finance

Securities 
Securities are the second major group of bank assets and account for about 
one-fi fth of total assets. Securities issued by the U.S. Treasury and by U.S. government cor-
porations and agencies account for about three-fourths of the total securities held by banks. 
Commercial banks also hold debt securities issued by state and local governments, as well 
as other types of debt instruments. Equity securities include investments in mutual funds and 
other equity securities, such as the holding of capital stock in a Federal Reserve Bank. Mem-
ber banks of the Fed must hold shares of stock in the Federal Reserve Bank in their district.
Loans 
Loans account for about three-fi fths of bank assets, making this the most important 
account category. Loans secured by real estate comprise about two-fi fths of total bank loans 
and also represent one-fourth of total bank assets. In a 
secured loan
, specifi c property is 
pledged as collateral for the loan. In the event the borrower fails to repay the loan, the lending 
institution will take the assets pledged as collateral for the loan. In all cases, the borrower is 
required to sign a note specifying the details of the indebtedness, but unless specifi c assets are 
pledged for the loan, it is classifi ed as unsecured.
The second most important loan category is composed of commercial and industrial 
loans, which represent a little more than one-fourth of all bank loans. These are loans made 
to businesses, and they may be secured or unsecured. An 
unsecured loan
represents a gen-
eral claim against the assets of the borrower. The interest rate charged by banks for short-
term unsecured loans to their highest-quality business customers is referred to as the 
prime 
rate
. This represents, in theory, the lowest business loan rate available at a particular point 
and is sometimes called the fl oor rate.
2
Less-qualifi ed business borrowers will be charged a 
higher rate; for example, prime plus two percentage points. If the prime rate is 5 percent, then 
the fi nancially weaker business borrower would be charged 7 percent (5 percent prime plus 
2 percentage points more).
Since the peak in bank prime rates at around 20 percent during the early 1980s, rates have 
been in a general decline. A secondary peak occurred in 2006 at 8.25 percent. However, as the 
2007–08 fi nancial crisis and the 2008–09 Great Recession unfolded, the prime rate declined to 
3.25 percent by 2009. Monetary easing eff orts by the Fed contributed to the prime rate staying 
at the 3.25 percent level through late 2015. In December 2015, the Fed started to move away 
from monetary easing by increasing its target for the federal funds rate by .25 percent, and the 
bank prime rate was increased to 3.5 percent.
A loan customarily includes a specifi ed rate of interest, such as the prevailing prime 
rate or prime plus some percentage point amount. For short-term loans, the interest often is