Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know

By William G. Droms | Go to book overview

14
Sources and Forms
of Long-Term Financing

THE MONEY AND CAPITAL MARKETS

Conventional financial terminology divides the external market for funds into the money market and the capital market. The money market encompasses short-term debt securities -- that is, securities that will mature in less than one year. Money market securities include such issues as Treasury bills, commercial paper, bankers' acceptances, and certificates of deposit.

The capital market is the market for longer-term funds -- that is, sources of financing with a time horizon of more than one year. As a general guideline, securities with a maturity of more than one but less than ten years may be considered to be intermediate-term securities. Long-term securities generally have a maturity of ten or more years.

In recent years, the persistence of inflation and volatile interest rates has caused corporations to shift toward more extensive use of intermediate-term debt in place of long-term debt. Bankers, investors, and other lenders have become increasingly reluctant to commit funds to traditional fixed-rate, long-term bonds, mortgages, and loans. This reluctance has also resulted in the use of floating-rate bonds and mortgages. Such issues have interest rates that fluctuate with market rates.

The capital market also encompasses the market for equity securities. Preferred and common stock have the longest time horizon since these securities are normally issued for the life of the corporation. Thus, they may be thought of as sources of financing with an infinite time horizon.

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