Introduction to Finance

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taxes are greater than tax liabilities and dividends, resulting in undis-
tributed profi ts.
LO 7.4 
The factors that aff ect savings in a given period are levels 
of income, economic expectations, cyclical infl uences, and life stage 
of the individual saver or corporation. Individual savings depend on 
the life stage of the saver which could be formative/education devel-
oping, career starting/family creating, wealth building, or retirement 
enjoying. Corporate savings also depend on the life stage of the cor-
poration which could be start-up stage, survival stage, rapid growth 
stage, or maturity stage. 
LO 7.5 
Capital market securities are corporate stocks and debt securities 
with maturities longer than one year. The major capital market securit-
ies that facilitate the savings and investment process include mortgages, 
Treasury notes/bonds, municipal bonds, corporate bonds, and corporate 
stocks. A mortgage is a loan backed by real property in the form of 
buildings and houses. The federal government issues Treasury securities, 
and state and local governments issue municipal bonds. As the label 
indicates, corporations issue corporate bonds and corporate stocks.
LO 7.6 
Individuals may obtain either a fi xed-rate mortgage loan or an 
adjustable-rate mortgage loan. A fi xed-rate mortgage has a fi xed interest 
rate with constant monthly payments over the life of the loan, which is, 
typically, 15 or 30 years. An adjustable-rate mortgage has an interest 
rate that changes or varies over time according to market-determined 
interest rates on a Treasury bill or other debt security. Banks and other 
fi nancial institutions that originate mortgage loans do not necessarily 
hold these loans but, rather, can sell them in secondary mortgage mar-
kets, and in so doing can free up funds for making new mortgage loans. 
LO 7.7 
Individuals as a unit had personal savings rates that were at low, 
double-digit levels in the 1960s and 1970s before declining to the high 
single-digit levels in the 1980s and 1990s. However, a change seems 
to have occurred in the fi rst half of the 2000–10 period when per-
sonal savings rates dropped to the low, single-digit levels. Individuals 
acquired risky mortgage loans and increased their credit card and other 
debt. Resulting debt defaults contributed to severity of the 2007–08 
fi nancial crisis. More recently, personal savings rates have returned to 
the upper, single-digit levels and individuals have been de-leveraging.
Key Terms
adjustable-rate mortgage (ARM)
capital consumption adjustment
capital formation
capital market securities
common stock
contractual savings
corporate bond
corporate retention rate
credit rating
credit score
derivative security
discretionary spending
dissaving
economic unit savings
federal statutory debt limits
fi xed-rate mortgage
government expenditures (GE)
gross private domestic 
investment (GPDI)
mandatory spending
mortgage
mortgage-backed security
mortgage markets
municipal bond
net exports (NE)
personal consumption 
expenditures (PCE)
personal saving
personal savings rate
prime mortgage
savings defi cit unit
savings surplus unit
securitization
subprime mortgage
Treasury note/bond
voluntary savings
undistributed profi ts
Review Questions