Introduction to Finance

Go to the website of the Federal Reserve Board of Governors of the Federal Reserve 
System, http://www.federalreserve.gov, and identify current interest rates on U.S. 
Treasury bonds.
7.6
Mortgage Markets
An important element of the savings-investment process is the availability of fi nancing to 
purchase homes. Since most individuals do not have the funds to purchase their home out-
right, they must rely on mortgage loans. 
Mortgage markets
are markets in which mortgage 
loans are created to purchase buildings and houses and are originated in primary markets and 
traded in secondary markets. Mortgage debt is, typically, divided into farm loans, nonfarm 
loans, nonresidential loans that include commercial property, and residential property loans. 
Mortgage loans on residential property also are typically divided into multifamily loans and 
corporate bond 
debt instrument 
issued by a corporation to raise 
longer-term funds
common stock 
ownership interest 
in a corporation
derivative security 
fi nancial 
contract that derives its value from 
a bond, stock, or other asset
mortgage markets 
where mortgage 
loans to purchase buildings and 
houses are originated and traded
FIGURE 7.2
Major Capital Market Securities
Securities
Typical 
Maturities
Issuers
Investors
Secondary
Market
Mortgages 
5 to 30 years
Financial 
intermediaries
Individuals, 
business 
firms, 
and institutions
High activity
Treasury notes/
bonds
2 to 30 years
U.S. government
Individuals, 
business 
firms, 
and institutions
High activity
Municipal bonds
2 to 40 years
State/local 
governments
Individuals, 
business 
firms, 
and institutions
Moderate
activity
Corporate bonds
2 to 30 years
Corporations
Individuals, 
business 
firms, 
and institutions
Moderate
activity
Corporate stocks
None
Corporations
Individuals, 
business 
firms, 
and institutions
High activity
4
Various types of corporate bonds and stocks, as well as their characteristics, are discussed in Chapter 10. Primary 
and secondary markets for corporate bonds and stocks are covered in Chapter 11.

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7.6 Mortgage Markets
183
one- to four-family loans. Residential mortgages account for the largest portion of outstand-
ing mortgage debt and, thus, receive emphasis in this text. Furthermore, because residential 
mortgage-related developments contributed to the recent fi nancial crisis, we discuss mortgage 
markets fundamentals now.
Mortgage loans are federally insured or conventional mortgages. In the event a borrower 
defaults on a mortgage, federal insurance guarantees the loan repayment to the bank making 
the mortgage loan. The Federal Housing Administration (FHA) and the Veterans Administra-
tion (VA) provide insurance on FHA and VA mortgage loans. Lenders making conventional 
mortgage loans may assume the risk that the borrower may default or purchase private insur-
ance to protect against borrower default.
Types of Mortgages and Mortgage-Backed Securities
The purchase of houses in the United States traditionally has been fi nanced with fi xed interest 
rate, long-term loans. A