Role of Capital Markets

ROLE OF CAPITAL MARKETS

The capital market provides financing to meet the denomination, liquidity, maturity, risk (with respect to credit, interest rate, and market), and other characteristics desired by those who have a surplus of funds and those who have a deficit of funds. The capital market as a whole consists of overnight to long-term funding. The short to medium end of the maturity spectrum is called the money market proper, and the long end is identified as the capital market. The financial instruments range from money market instruments to thirty-year or longer bonds in credit markets, equity instruments, insurance instruments, foreign-exchange instruments, hybrid instruments, and derivative instruments. There has been an explosion of innovation in the creation and development of instruments in the money and capital markets since about 1960 in both debt and equity instruments.

Some of the important (by volume) money market instruments are Treasury bills, federal agency securities, federal funds, negotiable certificates of deposits, commercial paper, bankers' acceptances, repurchase agreements, eurocurrency deposits, eurocurrency loans, futures instruments and options instruments. Similarly, some of the key capital market instruments are U.S. securities; U.S. agency securities; corporate bonds; state and local government bonds; mortgage instruments; financial guarantees; securitized instruments; broker-dealer loans; foreign, international, and global bonds; and eurobonds.

THE CAPITAL MARKET IN THE UNITED STATES

The capital market in the United States is highly developed, marked by sophisticated technology, specialized financing institutions and functions, wide-ranging geographic locations, and continuous innovation in financial products and services to meet the needs of financial investors and those seeking to acquire finances. There are both direct and indirect markets. Corporations, for example, engage in direct finance when they invest in one...