Introduction to Finance

Pension funds
receive contributions from employees and/or their employers and 
invest the proceeds on behalf of the employees. The purpose of a pension plan is to provide 
income during an individual’s retirement years. Pension funds are either private pension 
plans or government-sponsored plans. Many business organizations provide private pen-
sion plans for their employees. A private pension plan may be either insured or noninsured. 
A contractual plan with a life insurance company is an insured plan. An uninsured plan 
uses a trustee, often a commercial bank or trust company, to manage, invest, and distribute 
benefi ts as established in the trust arrangement. Government-sponsored plans may involve 
either the federal government or state and local governments. Social Security is the largest 
federal pension plan. The Social Security plan is funded by currently working individu-
als paying Social Security taxes. Social Security is designed to provide only minimum 
retirement benefi ts, so most individuals will need to accumulate additional funds before 
retirement. The federal government also provides pension plans for its employees, known 
as civil servants, as well as for military employees. State and local government pension 
plans typically are established to cover teachers, police and fi re employees, and other civil 
servants.
Securities Firms
Securities fi rms perform several fi nancial functions. Some securities fi rms are active in the 
savings-investment process, while others concentrate primarily on marketing new securities 
and facilitating the transfer of existing securities between investors. 
Investment companies
sell shares in their fi rms to individuals and others and invest the pooled proceeds in corporate 
and government securities. An investment company may be either a closed-end fund or an 
open-end fund. A closed-end fund issues a fi xed number of its shares to investors and invests 
the pooled funds in securities. Shares in a closed-end fund are bought and sold in secondary 
securities markets once they have been initially issued. 
Open-end funds, typically called 
mutual funds
, can issue an unlimited number of their 
shares to their investors and use the pooled proceeds to purchase corporate and government 
securities. However, unlike with closed-end funds, investors purchase new shares or redeem 
old shares directly with their mutual fund rather than buying and selling the shares in a sec-
ondary securities market. Figure 3.2, which focuses on getting funds to business fi rms, depicts 
the important role that mutual funds play by selling shares to individual investors and then 
using the proceeds to purchase debt and equity securities issued by business fi rms. Mutual 
funds grow by investing the funds of their existing investors in securities that will pay or dis-
tribute cash and will appreciate in value. Successful mutual funds attract more investor funds 
and, in turn, invest in more securities.