Introduction to Finance

Personal Financial Planning

---

7.5 Capital Market Securities
181
with respect to its fi nancial assets. Indeed, it is during these years of the corporate life cycle 
that there is a large need for borrowed capital. At this time, the corporation is typically a heavy 
user of fi nancial assets rather than a provider.
As the fi rm reaches the second part of its rapid growth stage, it begins building surplus or 
“free” cash fl ow and increasing the fi rm’s value. Free cash is money available after funds have 
been reinvested in the fi rm to sustain its growth. As the enterprise matures and its growth rate 
slows down to one that is sustainable in the long-run, it reaches its peak of savings. Earnings 
and cash fl ows are high, and commitment of funds to increased operating assets is reduced. 
The maturity stage can last almost indefi nitely, as long as the fi rm remains competitive in 
its industry. Of course, sometimes a fi rm’s products or services are no longer competitive or 
needed by consumers, and the fi rm again starts consuming more cash than it brings in. Such 
fi rms will eventually cease to exist.
7.5
Capital Market Securities
Financial markets play an important role in the marketing and transferring of fi nancial assets 
and, thus, are an integral part of the savings and investment process. In Chapter 1 we defi ned 
money markets
as markets where debt securities of one year or less are issued or traded. 
In Chapter 2 we discussed 
money market securities
—which, as you recall, are debt instru-
ments or securities with maturities of one year or less. The major securities that trade in 
the money markets are Treasury bills, negotiable certifi cates of deposit, commercial paper, 
banker’s acceptances, repurchase agreements, and federal funds. Treasury bills and negotiable 
certifi cates of deposit are short-term investment vehicles available to individuals. These two 
short-term investments as well as commercial paper, banker’s acceptances, and repurchase 
agreements are investments used by business fi rms. Federal funds are used by depository 
institutions with excess funds lending to depository institutions that have a need for funds. 
In Chapter 1 we also defi ned 
capital markets 
as markets were debt securities with maturi-
ties longer than one year and corporate stocks are issued or traded.