to after-tax income at different rates. For example, high-tax- bracket investors naturally will seek tax-free securities, compared with low-tax-bracket investors who want primarily higher-yielding taxable securities. A desire to minimize taxes also leads to demand for securities that are exempt from state and local taxes. This, in turn, causes demand for portfolios that specialize in tax-exempt bonds of one particular state. In other words, differential tax status creates "tax clienteles" that in turn give rise to demand for a range of assets with a variety of tax implications. The demand of investors encourages entrepreneurs to offer such portfolios (for a fee, of course!). Risk considerations also create demand for a diverse set of investment alternatives. At an obvious level, differences in risk tolerance create demand for assets with a variety of risk-return combinations. Individuals also have particular hedging requirements that con- tribute to diverse investment demands. Consider, for example, a resident of New York City who plans to sell her house and re- tire to Miami, Florida, in 15 years. Such a plan seems feasible if real estate prices in the two cities do not diverge before her retirement. How can one hedge Miami real estate prices now, short of purchasing a home there immediately rather than at retirement? One way to hedge the risk is to purchase securities that will increase in value if Florida real estate be- comes more expensive. This creates a hedging demand for an asset with a particular risk characteristic. Such demands lead profit-seeking financial corporations to supply the de- sired goods: observe Florida real estate investment trusts (REITs) that allow individuals to invest in securities whose performance is tied to Florida real estate prices. If Florida real estate becomes more expensive, the REIT will increase in value. The individuals loss as a potential purchaser of Florida real estate is offset by her gain as an investor in that real es- tate. This is only one example of how a myriad of risk-specific assets are demanded and created by agents in the financial environment. Risk motives also lead to demand for ways that investors can easily diversify their port- folios and even out their risk exposure. We will see that these diversification motives in- evitably give rise to mutual funds that offer small individual investors the ability to invest in a wide range of stocks, bonds, precious metals, and virtually all other financial instruments.     The Business Sector   Whereas household financial decisions are concerned with how to invest money, busi- nesses typically need to raise money to finance their investments in real assets: plant, equipment, technological know-how, and so forth. Table 1.5 presents balance sheets of U.S. corporations as a whole. The heavy concentration on tangible assets is obvious. Broadly speaking, there are two ways for businesses to raise money-they can borrow it, either from banks or directly from households by issuing bonds, or they can "take in new part- ners" by issuing stocks, which are ownership shares in the firm. Businesses issuing securities to the public have several objectives. First, they want to get the best price possible for their securities. Second, they want to market the issues to the public at the lowest possible cost. This has two implications. First, businesses might want