B. Divisions of the Money and Capital Markets

The money market and the capital market may be further subdivided into smaller markets, each important to selected groups of demanders and suppliers of funds. Within the money market, for example, is the huge Treasury bill market. Treasury bills - a short-term government IOU - are a safe and popular investment medium for financial institutions and corporations of all sizes.

Nearly as large in total dollar volume is the market for negotiable certificates of deposit (CDs) issued by the largest, best-known commercial banks and other depository institutions. Depository institutions use the funds raised from CDs and other sources to extend loans to corporations and other borrowers. Two other important money market instruments evidencing loans to corporations are bankers' acceptances and commercial paper - both short-term IOUs issued by large, well-established borrowers of funds. *Still another portion of the money market is devoted to trading in federal funds, which are essentially reserve balances of banks held at the Federal Reserve and with other banks that are immediately transferable anywhere by wire. Another segment of the money market reaches around the globe to encompass suppliers and demanders of short-term funds in Europe, Asia, and the Middle East. This is the vast and largely unregulated Eurocurrency market, where bank deposits denominated in the world's major trading currencies - the dollar, the franc, the pound, the yen, and the mark are loaned to corporations and governments all over the globe.

*The capital market, too, is divided into several major sectors, each having special characteristics and its own collection of suppliers and demanders of funds. For example, the largest segment of the capital market is devoted to mortgage loans to support the building of homes, apartments, and business structures such as factories and shopping centers. State and local governments sell their tax-exempt (municipal) bonds in another sector of the capital market. Households borrow in yet another segment of the capital market, using consumer loans to make purchases ranging from automobiles to home appliances. There is also an international capital market represented by Eurobonds and Euronotes.

Probably the best-known segment of the capital market is the market for corporate stock represented by the major exchanges, such as the New York Stock Exchange (NYSE) and the Tokyo Exchange and a vast over-the-counter (OTC) market for individual stocks. No matter where it is sold, however, each share of stock (equity) represents a certificate of ownership in a corporation, entitling the holder to receive any dividends that may be paid out of current company earnings. Corporations also sell a huge quantity of corporate notes and bonds in the capital market each year to raise long-term funds. These securities, unlike shares of stock, are pure IOUs, evidencing a debt owed plus an obligation to pay interest to the holder.