Introduction to Finance

Capital market securities 
are corporate stocks and debt securities with maturities longer than one year. Capital markets 
are important to individuals seeking to fi nance home purchases, and they are very important 
to corporations who raise funds to fi nance their operations. Individuals and corporations with 
excess funds also invest in capital market securities.
Figure 7.2
identifi es the basic securities that are issued and traded in capital securities 
markets. In Chapter 3 we initially defi ned a mortgage. We review the defi nition here as part of 
our discussion of capital market securities. A 
mortgage
is a loan backed by real property in 
the form of buildings and houses. In the event the debt is not repaid, the lender can use pro-
ceeds from the sale of the real property to extinguish any remaining loan interest or principal 
balance. Individuals rely heavily on residential mortgages to assist them in owning their own 
homes. Businesses also often fi nd it worthwhile to borrow against the real property they own.
Bonds are longer-term debt instruments issued by government units and business corpora-
tions. A 
Treasury note/bond
is a debt instrument or security issued by the U.S. federal govern-
ment with typical maturities ranging from two years up to 30 years. Treasury notes or bonds 
are sold to raise funds needed to reconcile longer-term imbalances between tax receipts and 
government expenditures. These securities have very low risks of default, and investors know 
that they are easily marketable in the secondary securities market. For example, if an investor 
initially purchases a 20-year Treasury bond and later identifi es another investment opportunity, 
the bond can be easily sold in the secondary capital market. A 
municipal bond
is a debt instru-
ment or security issued by a state or local government. Maturities on state and local govern-
ment bonds, are generally greater than one year and up to 40 years. However, municipal bonds 
issued to build airports or bridges may have their maturities set approximately equal to the 
expected lives of the assets being fi nanced. Some investors fi nd municipal bonds to be attractive 
investments because the interest paid on these securities is exempt from federal income taxes 
and because these bonds also can be sold in a secondary market.
Corporations issue fi nancial instruments, or securities, called debt and equity to raise 
funds to acquire real assets to support the operations of their fi rms. Corporate debt instruments