Introduction to Finance

capital market securities 
debt 
securities with maturities longer 
than one year and corporate stocks
mortgage 
loan backed by real 
property in the form of buildings 
and houses
Treasury note/bond 
debt 
instrument issued by the U.S. 
federal government
municipal bond 
debt instrument 
issued by a state or local government

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C H A PT E R 7 Savings and Investment Process
are bonds and equity securities are stocks. A 
corporate bond
is a debt instrument issued by a 
corporation to raise longer-term funds. Corporate bonds are, typically, issued with maturities 
ranging from greater than one year up to 30 years and may be secured by the pledge of real 
property, plant, or equipment or they may be issued with only the backing of the general credit 
strength of the corporation. A share of 
common stock
represents an ownership interest in a 
corporation. Corporations often issue new shares of their common stocks to raise funds for 
capital expenditures and investments in inventories. Active secondary markets exist for trad-
ing the common stocks of larger corporations after the stocks are initially issued. Corporations 
also can issue various classes of common stock, another type of stock called 
preferred stock
, 
and even securities that are convertible into shares of common stock.
4
Corporations also can use derivative securities to insure or hedge against various fi nan-
cial risks. A 
derivative security
is a fi nancial contract that derives its value from the value 
of another asset such as a bond or stock. The use of derivative securities is explored in the 
Learning Extension to Chapter 11.
LEARNING ACTIVITY