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Abstract
This title is part of a new Pearson program pilot offering students the option to rent a print textbook for fall 2017. By having affordable access to the best learning materials and experiences from day-one, students come to class prepared and ready to succeed. Additional details on the rental program will be coming soon.
For courses in financial markets.
Real-world applications help students navigate the shifting financial landscape
Financial Markets and Institutions takes a practical approach to the changing landscape of financial markets and institutions. Best-selling authors Frederic S. Mishkin and Stanley G. Eakins use core principles to introduce students to topics, then examine these models with real-world scenarios. Empirical applications of themes help students develop essential critical-thinking and problem-solving skills, preparing them for future careers in business and finance. The 9th Edition combines the latest, most relevant information and policies with the authors’ hallmark pedagogy to give instructors a refined tool to improve the learning experience.Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Cover | Cover | ||
| Title Page | 1 | ||
| Copyright Page | 4 | ||
| Contents in Brief | 7 | ||
| Contents in Detail | 9 | ||
| Contents on the Web | 27 | ||
| Preface | 31 | ||
| Acknowledgments | 37 | ||
| About the Authors | 39 | ||
| Part One: Introduction | 41 | ||
| Chapter 1: Why Study Financial Markets and Institutions? | 41 | ||
| Preview | 41 | ||
| Why Study Financial Markets? | 42 | ||
| Debt Markets and Interest Rates | 42 | ||
| The Stock Market | 43 | ||
| The Foreign Exchange Market | 44 | ||
| Why Study Financial Institutions? | 46 | ||
| Structure of the Financial System | 46 | ||
| Financial Crises | 46 | ||
| Central Banks and the Conduct of Monetary Policy | 47 | ||
| The International Financial System | 47 | ||
| Banks and Other Financial Institutions | 47 | ||
| Financial Innovation | 47 | ||
| Managing Risk in Financial Institutions | 48 | ||
| Applied Managerial Perspective | 48 | ||
| How We Will Study Financial Markets and Institutions | 49 | ||
| Exploring the Web | 49 | ||
| Collecting and Graphing Data | 50 | ||
| Web Exercise | 50 | ||
| Concluding Remarks | 52 | ||
| Summary | 52 | ||
| Key Terms | 53 | ||
| Questions | 53 | ||
| Quantitative Problems | 54 | ||
| Web Exercises | 54 | ||
| Chapter 2: Overview of the Financial System | 55 | ||
| Preview | 55 | ||
| Function of Financial Markets | 56 | ||
| Structure of Financial Markets | 58 | ||
| Debt and Equity Markets | 58 | ||
| Primary and Secondary Markets | 58 | ||
| Exchanges and Over-the-Counter Markets | 59 | ||
| Money and Capital Markets | 60 | ||
| Internationalization of Financial Markets | 60 | ||
| International Bond Market, Eurobonds, and Eurocurrencies | 60 | ||
| Global: Are U.S. Capital Markets Losing Their Edge? | 61 | ||
| World Stock Markets | 62 | ||
| Function of Financial Intermediaries: Indirect Finance | 62 | ||
| Following the Financial News: Foreign Stock Market Indexes | 63 | ||
| Global: The Importance of Financial Intermediaries Relative to Securities Markets: An International Comparison | 63 | ||
| Transaction Costs | 63 | ||
| Risk Sharing | 64 | ||
| Asymmetric Information: Adverse Selection and Moral Hazard | 65 | ||
| Economies of Scope and Conflicts of Interest | 66 | ||
| Types of Financial Intermediaries | 67 | ||
| Depository Institutions | 67 | ||
| Contractual Savings Institutions | 68 | ||
| Investment Intermediaries | 70 | ||
| Regulation of the Financial System | 71 | ||
| Increasing Information Available to Investors | 72 | ||
| Ensuring the Soundness of Financial Intermediaries | 72 | ||
| Financial Regulation Abroad | 73 | ||
| Summary | 74 | ||
| Key Terms | 75 | ||
| Questions | 75 | ||
| Web Exercises | 76 | ||
| Part Two: Fundamentals of Financial Markets | 77 | ||
| Chapter 3: What Do Interest Rates Mean and What Is Their Role in Valuation? | 77 | ||
| Preview | 77 | ||
| Measuring Interest Rates | 78 | ||
| Present Value | 78 | ||
| Four Types of Credit Market Instruments | 80 | ||
| Yield to Maturity | 81 | ||
| Global: Negative Interest Rates? Japan First, Then the United States, Then Europe | 87 | ||
| The Distinction Between Real and Nominal Interest Rates | 88 | ||
| Mini-Case: With TIPS, Real Interest Rates Have Become Observable in the United States | 91 | ||
| The Distinction Between Interest Rates and Returns | 91 | ||
| Maturity and the Volatility of Bond Returns: Interest-Rate Risk | 94 | ||
| Mini-Case: Helping Investors Select Desired Interest-Rate Risk | 95 | ||
| Reinvestment Risk | 95 | ||
| Summary | 96 | ||
| The Practicing Manager: Calculating Duration to Measure Interest-Rate Risk | 96 | ||
| Calculating Duration | 97 | ||
| Duration and Interest-Rate Risk | 101 | ||
| Summary | 102 | ||
| Key Terms | 103 | ||
| Questions | 103 | ||
| Quantitative Problems | 103 | ||
| Web Exercises | 105 | ||
| Chapter 4: Why Do Interest Rates Change? | 106 | ||
| Preview | 106 | ||
| Determinants of Asset Demand | 107 | ||
| Wealth | 107 | ||
| Expected Returns | 107 | ||
| Risk | 108 | ||
| Liquidity | 110 | ||
| Theory of Portfolio Choice | 110 | ||
| Supply and Demand in the Bond Market | 110 | ||
| Demand Curve | 111 | ||
| Supply Curve | 112 | ||
| Market Equilibrium | 113 | ||
| Supply-and-Demand Analysis | 114 | ||
| Changes in Equilibrium Interest Rates | 114 | ||
| Shifts in the Demand for Bonds | 115 | ||
| Shifts in the Supply of Bonds | 118 | ||
| Case: Changes in the Interest Rate Due to Expected Inflation: The Fisher Effect | 120 | ||
| Case: Changes in the Interest Rate Due to a Business Cycle Expansion | 122 | ||
| Case: Explaining the Current Low Interest Rates in Europe, Japan, and the United States | 123 | ||
| The Practicing Manager: Profiting from Interest-Rate Forecasts | 124 | ||
| Following the Financial News: Forecasting Interest Rates | 126 | ||
| Summary | 126 | ||
| Key Terms | 126 | ||
| Questions | 126 | ||
| Quantitative Problems | 127 | ||
| Web Exercises | 128 | ||
| Web Appendices | 128 | ||
| Chapter 5: How Do Risk and Term Structure Affect Interest Rates? | 129 | ||
| Preview | 129 | ||
| Risk Structure of Interest Rates | 130 | ||
| Default Risk | 130 | ||
| Liquidity | 133 | ||
| Case: The Global Financial Crisis and the Baa-Treasury Spread | 133 | ||
| Income Tax Considerations | 134 | ||
| Summary | 135 | ||
| Case: Effects of the Bush Tax Cut and the Obama Tax Increase on Bond Interest Rates | 136 | ||
| Term Structure of Interest Rates | 137 | ||
| Following the Financial News: Yield Curves | 138 | ||
| Expectations Theory | 139 | ||
| Market Segmentation Theory | 143 | ||
| Liquidity Premium Theory | 144 | ||
| Evidence on the Term Structure | 147 | ||
| Summary | 148 | ||
| Mini-Case: The Yield Curve as a Forecasting Tool for Inflation and the Business Cycle | 149 | ||
| Case: Interpreting Yield Curves, 1980–2016 | 149 | ||
| The Practicing Manager: Using the Term Structure to Forecast Interest Rates | 150 | ||
| Summary | 153 | ||
| Key Terms | 154 | ||
| Questions | 154 | ||
| Quantitative Problems | 155 | ||
| Web Exercises | 156 | ||
| Chapter 6: Are Financial Markets Efficient? | 157 | ||
| Preview | 157 | ||
| The Efficient Market Hypothesis | 158 | ||
| Rationale Behind the Hypothesis | 160 | ||
| Evidence on the Efficient Market Hypothesis | 161 | ||
| Evidence in Favor of Market Efficiency | 161 | ||
| Mini-Case: An Exception That Proves the Rule: Raj Rajaratnam and Galleon | 162 | ||
| Case: Should Foreign Exchange Rates Follow a Random Walk? | 164 | ||
| Evidence Against Market Efficiency | 165 | ||
| Overview of the Evidence on the Efficient Market Hypothesis | 167 | ||
| The Practicing Manager: Practical Guide to Investing in the Stock Market | 167 | ||
| How Valuable Are Published Reports by Investment Advisers? | 167 | ||
| Mini-Case: Should You Hire an Ape as Your Investment Adviser? | 168 | ||
| Should You Be Skeptical of Hot Tips? | 168 | ||
| Do Stock Prices Always Rise When There Is Good News? | 169 | ||
| Efficient Markets Prescription for the Investor | 169 | ||
| Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient | 170 | ||
| Case: What Do Stock Market Crashes Tell Us About the Efficient Market Hypothesis? | 171 | ||
| Behavioral Finance | 171 | ||
| Summary | 172 | ||
| Key Terms | 173 | ||
| Questions | 173 | ||
| Quantitative Problems | 174 | ||
| Web Exercises | 174 | ||
| Part Three: Fundamentals of Financial Institutions | 175 | ||
| Chapter 7: Why Do Financial Institutions Exist? | 175 | ||
| Preview | 175 | ||
| Basic Facts About Financial Structure Throughout the World | 176 | ||
| Transaction Costs | 179 | ||
| How Transaction Costs Influence Financial Structure | 179 | ||
| How Financial Intermediaries Reduce Transaction Costs | 179 | ||
| Asymmetric Information: Adverse Selection and Moral Hazard | 180 | ||
| The Lemons Problem: How Adverse Selection Influences Financial Structure | 181 | ||
| Lemons in the Stock and Bond Markets | 182 | ||
| Tools to Help Solve Adverse Selection Problems | 182 | ||
| Mini-Case: The Enron Implosion | 184 | ||
| How Moral Hazard Affects the Choice Between Debt and Equity Contracts | 187 | ||
| Moral Hazard in Equity Contracts: The Principal–Agent Problem | 187 | ||
| Tools to Help Solve the Principal–Agent Problem | 188 | ||
| How Moral Hazard Influences Financial Structure in Debt Markets | 190 | ||
| Tools to Help Solve Moral Hazard in Debt Contracts | 190 | ||
| Summary | 192 | ||
| Case: Financial Development and Economic Growth | 194 | ||
| Mini-Case: The Tyranny of Collateral | 195 | ||
| Case: Is China a Counter-Example to the Importance of Financial Development? | 196 | ||
| Conflicts of Interest | 197 | ||
| What Are Conflicts of Interest and Why Do We Care? | 197 | ||
| Why Do Conflicts of Interest Arise? | 197 | ||
| Mini-Case: The Demise of Arthur Andersen | 199 | ||
| Mini-Case: Credit-Rating Agencies and the 2007–2009 Financial Crisis | 200 | ||
| What Has Been Done to Remedy Conflicts of Interest? | 200 | ||
| Mini-Case: Has Sarbanes-Oxley Led to a Decline in U.S. Capital Markets? | 202 | ||
| Summary | 202 | ||
| Key Terms | 203 | ||
| Questions | 203 | ||
| Quantitative Problems | 204 | ||
| Web Exercises | 205 | ||
| Chapter 8: Why Do Financial Crises Occur and Why Are They So Damaging to the Economy? | 206 | ||
| Preview | 206 | ||
| What Is a Financial Crisis? | 207 | ||
| Agency Theory and the Definition of a Financial Crisis | 207 | ||
| Dynamics of Financial Crises | 207 | ||
| Stage One: Initial Phase | 207 | ||
| Stage Two: Banking Crisis | 210 | ||
| Stage Three: Debt Deflation | 211 | ||
| Case: The Mother of All Financial Crises: The Great Depression | 211 | ||
| Stock Market Crash | 211 | ||
| Bank Panics | 211 | ||
| Continuing Decline in Stock Prices | 212 | ||
| Debt Deflation | 213 | ||
| International Dimensions | 213 | ||
| Case: The Global Financial Crisis of 2007–2009 | 214 | ||
| Causes of the 2007–2009 Financial Crisis | 214 | ||
| Mini-Case: Collateralized Debt Obligations (CDOs) | 215 | ||
| Effects of the 2007–2009 Financial Crisis | 216 | ||
| Inside the Fed: Was the Fed to Blame for the Housing Price Bubble? | 217 | ||
| Global: The European Sovereign Debt Crisis | 220 | ||
| Height of the 2007–2009 Financial Crisis | 221 | ||
| Summary | 222 | ||
| Key Terms | 223 | ||
| Questions | 223 | ||
| Web Exercises | 223 | ||
| Web References | 224 | ||
| Part Four: Central Banking and the Conduct of Monetary Policy | 225 | ||
| Chapter 9: Central Banks | 225 | ||
| Preview | 225 | ||
| Origins of the Central Banking System | 226 | ||
| Global: Who Should Own Central Banks? | 226 | ||
| Variations in the Functions and Structures of Central Banks | 227 | ||
| The European Central Bank, the Euro System, and the European System of Central Banks | 228 | ||
| Decision-Making Bodies of the ECB | 230 | ||
| How Monetary Policy is Conducted within the ECB | 231 | ||
| Global: The Importance of the Bundesbank within the ECB | 232 | ||
| Global: Are Non-Euro Central Banks Constrained by Membership of the EU? | 233 | ||
| The Federal Reserve System | 234 | ||
| Difference between the ECB and the Fed | 234 | ||
| The Bank of England | 235 | ||
| Global: Brexit and the BoE | 236 | ||
| Structure of Central Banks of Larger Economies | 236 | ||
| The Bank of Canada | 237 | ||
| The Bank of Japan | 238 | ||
| The People’s Bank of China | 238 | ||
| Structure and Independence of Central Banks of Emerging Market Economies | 239 | ||
| Central Banks and Independence | 240 | ||
| The Case for Independence | 240 | ||
| The Case Against Independence | 240 | ||
| The Trend Toward Greater Independence | 241 | ||
| Summary | 241 | ||
| Key Terms | 242 | ||
| Questions and Problems | 242 | ||
| Web Exercises | 243 | ||
| Chapter 10: Conduct of Monetary Policy | 244 | ||
| Preview | 244 | ||
| How Fed Actions Affect Reserves in the Banking System | 245 | ||
| Open Market Operations | 245 | ||
| Discount Lending | 246 | ||
| The Market for Reserves and the Federal Funds Rate | 247 | ||
| Demand and Supply in the Market for Reserves | 247 | ||
| How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate | 249 | ||
| Case: How the Federal Reserve’s Operating Procedures Limit Fluctuations in the Federal Funds Rate | 253 | ||
| Conventional Monetary Policy Tools | 254 | ||
| Open Market Operations | 254 | ||
| Inside the Fed: A Day at the Trading Desk | 255 | ||
| Discount Policy and the Lender of Last Resort | 255 | ||
| Reserve Requirements | 258 | ||
| Interest on Reserves | 258 | ||
| Nonconventional Monetary Policy Tools and Quantitative Easing | 258 | ||
| Liquidity Provision | 259 | ||
| Inside the Fed: Fed Lending Facilities During the Global Financial Crisis | 260 | ||
| Large-Scale Asset Purchases | 261 | ||
| Quantitative Easing Versus Credit Easing | 261 | ||
| Forward Guidance | 263 | ||
| Negative Interest Rates on Banks’ Deposits | 264 | ||
| Monetary Policy Tools of the European Central Bank | 265 | ||
| Open Market Operations | 265 | ||
| Lending to Banks | 265 | ||
| Interest on Reserves | 266 | ||
| Reserve Requirements | 266 | ||
| The Price Stability Goal and the Nominal Anchor | 266 | ||
| The Role of a Nominal Anchor | 267 | ||
| The Time-Inconsistency Problem | 267 | ||
| Other Goals of Monetary Policy | 268 | ||
| High Employment and Output Stability | 268 | ||
| Economic Growth | 269 | ||
| Stability of Financial Markets | 269 | ||
| Interest-Rate Stability | 269 | ||
| Stability in Foreign Exchange Markets | 270 | ||
| Should Price Stability Be the Primary Goal of Monetary Policy? | 270 | ||
| Hierarchical vs. Dual Mandates | 270 | ||
| Price Stability as the Primary, Long-Run Goal of Monetary Policy | 271 | ||
| Global: The European Central Bank’s Monetary Policy Strategy | 272 | ||
| Inflation Targeting | 272 | ||
| Advantages of Inflation Targeting | 272 | ||
| Inside the Fed: Ben Bernanke and the Federal Reserve’s Adoption of Inflation Targeting | 273 | ||
| Disadvantages of Inflation Targeting | 274 | ||
| Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis | 275 | ||
| Two Types of Asset-Price Bubbles | 276 | ||
| The Debate over Whether Central Banks Should Try to Pop Bubbles | 277 | ||
| The Practicing Manager: Using a Fed Watcher | 279 | ||
| Summary | 280 | ||
| Key Terms | 281 | ||
| Questions | 282 | ||
| Quantitative Problems | 283 | ||
| Web Exercises | 283 | ||
| Part Five: Financial Markets | 285 | ||
| Chapter 11: The Money Markets | 285 | ||
| Preview | 285 | ||
| The Money Markets Defined | 286 | ||
| Why Do We Need the Money Markets? | 286 | ||
| Money Market Cost Advantages | 287 | ||
| The Purpose of the Money Markets | 288 | ||
| Who Participates in the Money Markets? | 289 | ||
| U.S. Treasury Department | 289 | ||
| Federal Reserve System | 289 | ||
| Commercial Banks | 290 | ||
| Businesses | 290 | ||
| Investment and Securities Firms | 291 | ||
| Individuals | 291 | ||
| Money Market Instruments | 292 | ||
| Treasury Bills | 292 | ||
| Case: Discounting the Price of Treasury Securities to Pay the Interest | 292 | ||
| Mini-Case: Treasury Bill Auctions Go Haywire | 295 | ||
| Federal Funds | 296 | ||
| Repurchase Agreements | 297 | ||
| Negotiable Certificates of Deposit | 298 | ||
| Commercial Paper | 299 | ||
| Banker’s Acceptances | 301 | ||
| Eurodollars | 302 | ||
| Global: Ironic Birth of the Eurodollar Market | 302 | ||
| Comparing Money Market Securities | 303 | ||
| Interest Rates | 303 | ||
| Liquidity | 304 | ||
| How Money Market Securities Are Valued | 305 | ||
| Summary | 306 | ||
| Key Terms | 306 | ||
| Questions | 306 | ||
| Quantitative Problems | 307 | ||
| Web Exercises | 307 | ||
| Chapter 12: The Bond Market | 308 | ||
| Preview | 308 | ||
| Purpose of the Capital Market | 309 | ||
| Capital Market Participants | 309 | ||
| Capital Market Trading | 310 | ||
| Types of Bonds | 310 | ||
| Treasury Notes and Bonds | 310 | ||
| Treasury Bond Interest Rates | 311 | ||
| Treasury Inflation-Protected Securities (TIPS) | 313 | ||
| Treasury STRIPS | 313 | ||
| Agency Bonds | 313 | ||
| Case: The 2007–2009 Financial Crisis and the Bailout of Fannie Mae and Freddie Mac | 314 | ||
| Municipal Bonds | 315 | ||
| Risk in the Municipal Bond Market | 317 | ||
| Corporate Bonds | 317 | ||
| Characteristics of Corporate Bonds | 318 | ||
| Types of Corporate Bonds | 320 | ||
| Financial Guarantees for Bonds | 323 | ||
| Oversight of the Bond Markets | 324 | ||
| Current Yield Calculation | 324 | ||
| Current Yield | 325 | ||
| Finding the Value of Coupon Bonds | 326 | ||
| Finding the Price of Semiannual Bonds | 327 | ||
| Investing in Bonds | 329 | ||
| Summary | 330 | ||
| Key Terms | 331 | ||
| Questions | 331 | ||
| Quantitative Problems | 331 | ||
| Web Exercise | 332 | ||
| Chapter 13: The Stock Market | 333 | ||
| Preview | 333 | ||
| Investing in Stocks | 334 | ||
| Common Stock vs. Preferred Stock | 334 | ||
| How Stocks Are Sold | 335 | ||
| Computing the Price of Common Stock | 339 | ||
| The One-Period Valuation Model | 339 | ||
| The Generalized Dividend Valuation Model | 340 | ||
| The Gordon Growth Model | 341 | ||
| Price Earnings Valuation Method | 342 | ||
| How the Market Sets Security Prices | 343 | ||
| Errors in Valuation | 344 | ||
| Problems with Estimating Growth | 344 | ||
| Problems with Estimating Risk | 345 | ||
| Problems with Forecasting Dividends | 345 | ||
| Case: The 2007–2009 Financial Crisis and the Stock Market | 346 | ||
| Case: The September 11 Terrorist Attack, the Enron Scandal, and the Stock Market | 346 | ||
| Stock Market Indexes | 347 | ||
| Mini-Case: History of the Dow Jones Industrial Average | 347 | ||
| Buying Foreign Stocks | 350 | ||
| Regulation of the Stock Market | 350 | ||
| The Securities and Exchange Commission | 350 | ||
| Summary | 351 | ||
| Key Terms | 352 | ||
| Questions | 352 | ||
| Quantitative Problems | 352 | ||
| Web Exercises | 353 | ||
| Chapter 14: The Mortgage Markets | 354 | ||
| Preview | 354 | ||
| What Are Mortgages? | 355 | ||
| Characteristics of the Residential Mortgage | 356 | ||
| Mortgage Interest Rates | 356 | ||
| Case: The Discount Point Decision | 357 | ||
| Loan Terms | 359 | ||
| Mortgage Loan Amortization | 360 | ||
| Types of Mortgage Loans | 361 | ||
| Insured and Conventional Mortgages | 361 | ||
| Fixed- and Adjustable-Rate Mortgages | 362 | ||
| Other Types of Mortgages | 362 | ||
| Mortgage-Lending Institutions | 364 | ||
| Loan Servicing | 365 | ||
| E-Finance: Borrowers Shop the Web for Mortgages | 366 | ||
| Secondary Mortgage Market | 366 | ||
| Securitization of Mortgages | 367 | ||
| What Is a Mortgage-Backed Security? | 367 | ||
| Types of Pass-Through Securities | 369 | ||
| Subprime Mortgages and CDOs | 370 | ||
| The Real Estate Bubble | 371 | ||
| Summary | 372 | ||
| Key Terms | 372 | ||
| Questions | 372 | ||
| Quantitative Problems | 373 | ||
| Web Exercises | 374 | ||
| Chapter 15: The Foreign Exchange Market | 375 | ||
| Preview | 375 | ||
| Foreign Exchange Market | 376 | ||
| What Are Foreign Exchange Rates? | 377 | ||
| Why Are Exchange Rates Important? | 377 | ||
| Following the Financial News: Foreign Exchange Rates | 377 | ||
| How Is Foreign Exchange Traded? | 378 | ||
| Exchange Rates in the Long Run | 378 | ||
| Law of One Price | 379 | ||
| Theory of Purchasing Power Parity | 379 | ||
| Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates | 381 | ||
| Factors That Affect Exchange Rates in the Long Run | 381 | ||
| Exchange Rates in the Short Run: A Supply and Demand Analysis | 383 | ||
| Supply Curve for Domestic Assets | 383 | ||
| Demand Curve for Domestic Assets | 384 | ||
| Equilibrium in the Foreign Exchange Market | 385 | ||
| Explaining Changes in Exchange Rates | 385 | ||
| Shifts in the Demand for Domestic Assets | 385 | ||
| Recap: Factors That Change the Exchange Rate | 388 | ||
| Case: Effect of Changes in Interest Rates on the Equilibrium Exchange Rate | 390 | ||
| Case: Why Are Exchange Rates So Volatile? | 392 | ||
| Case: The Dollar and Interest Rates | 392 | ||
| Case: The Global Financial Crisis and the Dollar | 394 | ||
| The Practicing Manager: Profiting from Foreign Exchange Forecasts | 395 | ||
| Summary | 396 | ||
| Key Terms | 396 | ||
| Questions | 396 | ||
| Quantitative Problems | 397 | ||
| Web Exercises | 398 | ||
| Chapter 15: Appendix the Interest Parity Condition | 399 | ||
| Comparing Expected Returns on Domestic and Foreign Assets | 399 | ||
| Interest Parity Condition | 401 | ||
| Chapter 16: The International Financial System | 403 | ||
| Preview | 403 | ||
| Intervention in the Foreign Exchange Market | 404 | ||
| Foreign Exchange Intervention and Reserves in the Banking System | 404 | ||
| Inside the Fed: A Day at the Federal Reserve Bank of New York’s Foreign Exchange Desk | 405 | ||
| Unsterilized Intervention | 406 | ||
| Sterilized Intervention | 406 | ||
| Balance of Payments | 408 | ||
| Global: Why the Large U.S. Current Account Deficit Worries Economists | 409 | ||
| Exchange Rate Regimes in the International Financial System | 409 | ||
| Fixed Exchange Rate Regimes | 409 | ||
| How a Fixed Exchange Rate Regime Works | 410 | ||
| The Policy Trilemma | 412 | ||
| Monetary Unions | 413 | ||
| Global: Will the Euro Survive? | 414 | ||
| Currency Boards and Dollarization | 414 | ||
| Speculative Attacks | 414 | ||
| Global: Argentina’s Currency Board | 415 | ||
| Managed Float | 415 | ||
| Global: Dollarization | 416 | ||
| Case: The Foreign Exchange Crisis of September 1992 | 416 | ||
| The Practicing Manager: Profiting from a Foreign Exchange Crisis | 418 | ||
| Case: How Did China Accumulate over $3 Trillion of International Reserves? | 419 | ||
| Capital Controls | 420 | ||
| Controls on Capital Outflows | 420 | ||
| Controls on Capital Inflows | 420 | ||
| The Role of the IMF | 421 | ||
| Should the IMF Be an International Lender of Last Resort? | 421 | ||
| Summary | 422 | ||
| Key Terms | 422 | ||
| Questions | 423 | ||
| Quantitative Problems | 424 | ||
| Web Exercise | 424 | ||
| Part Six: The Financial Institutions Industry | 425 | ||
| Chapter 17: Banking and the Management of Financial Institutions | 425 | ||
| Preview | 425 | ||
| The Bank Balance Sheet | 426 | ||
| Liabilities | 426 | ||
| Assets | 428 | ||
| Basic Banking | 429 | ||
| General Principles of Bank Management | 432 | ||
| Liquidity Management and the Role of Reserves | 432 | ||
| Asset Management | 435 | ||
| Liability Management | 436 | ||
| Capital Adequacy Management | 437 | ||
| The Practicing Manager: Strategies for Managing Bank Capital | 439 | ||
| Case: How a Capital Crunch Caused a Credit Crunch During the Global Financial Crisis | 440 | ||
| Off-Balance-Sheet Activities | 440 | ||
| Loan Sales | 441 | ||
| Generation of Fee Income | 441 | ||
| Trading Activities and Risk Management Techniques | 441 | ||
| Conflicts of Interest: Barings, Daiwa, Sumitomo, Société Générale, and J.P. Morgan Chase: Rogue Traders and the Principal–Agent Problem | 442 | ||
| Measuring Bank Performance | 443 | ||
| Bank’s Income Statement | 444 | ||
| Measures of Bank Performance | 446 | ||
| Recent Trends in Bank Performance Measures | 446 | ||
| Summary | 448 | ||
| Key Terms | 449 | ||
| Questions | 449 | ||
| Quantitative Problems | 449 | ||
| Web Exercises | 450 | ||
| Chapter 18: Financial Regulation | 451 | ||
| Preview | 451 | ||
| Asymmetric Information as a Rationale for Financial Regulation | 452 | ||
| Government Safety Net | 452 | ||
| Global: The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing? | 454 | ||
| Types of Financial Regulation | 457 | ||
| Restrictions on Asset Holdings | 457 | ||
| Capital Requirements | 458 | ||
| Prompt Corrective Action | 459 | ||
| Financial Supervision: Chartering and Examination | 459 | ||
| Global: Where Is the Basel Accord Heading After the Global Financial Crisis? | 460 | ||
| Assessment of Risk Management | 461 | ||
| Disclosure Requirements | 462 | ||
| Consumer Protection | 463 | ||
| Mini-Case: Mark-to-Market Accounting and the Global Financial Crisis | 464 | ||
| Restrictions on Competition | 464 | ||
| Mini-Case: The Global Financial Crisis and Consumer Protection Regulation | 465 | ||
| Macroprudential Versus Microprudential Supervision | 466 | ||
| E-Finance: Electronic Banking: New Challenges for Bank Regulation | 466 | ||
| Summary | 467 | ||
| Global: International Financial Regulation | 468 | ||
| Banking Crises Throughout the World in Recent Years | 471 | ||
| “Déjà Vu All Over Again” | 471 | ||
| The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 | 473 | ||
| Dodd-Frank | 473 | ||
| Too-Big-to-Fail and Future Regulation | 474 | ||
| What Can Be Done About the Too-Big-to-Fail Problem? | 474 | ||
| Other Issues for Future Regulation | 475 | ||
| Summary | 476 | ||
| Key Terms | 477 | ||
| Questions | 477 | ||
| Quantitative Problems | 477 | ||
| Web Exercises | 478 | ||
| Web Appendix | 478 | ||
| Chapter 19: Banking Industry: Structure and Competition | 479 | ||
| Preview | 479 | ||
| Historical Development of the Banking System | 480 | ||
| Multiple Regulatory Agencies | 482 | ||
| Financial Innovation and the Growth of the Shadow Banking System | 482 | ||
| Responses to Changes in Demand Conditions: Interest Rate Volatility | 483 | ||
| Responses to Changes in Supply Conditions: Information Technology | 484 | ||
| E-Finance: Will “Clicks” Dominate “Bricks” in the Banking Industry? | 486 | ||
| E-Finance: Why Are Scandinavians So Far Ahead of Americans in Using Electronic Payments and Online Banking? | 487 | ||
| E-Finance: Are We Headed for a Cashless Society? | 488 | ||
| Securitization and the Shadow Banking System | 489 | ||
| Avoidance of Existing Regulations | 491 | ||
| Mini-Case: Bruce Bent and the Money Market Mutual Fund Panic of 2008 | 493 | ||
| The Practicing Manager: Profiting from a New Financial Product: A Case: Study of Treasury Strips | 493 | ||
| Financial Innovation and the Decline of Traditional Banking | 495 | ||
| Structure of the U.S. Banking Industry | 498 | ||
| Restrictions on Branching | 499 | ||
| Response to Branching Restrictions | 500 | ||
| Bank Consolidation and Nationwide Banking | 501 | ||
| E-Finance: Information Technology and Bank Consolidation | 503 | ||
| The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 | 503 | ||
| What Will the Structure of the U.S. Banking Industry Look Like in the Future? | 504 | ||
| Are Bank Consolidation and Nationwide Banking Good Things? | 504 | ||
| Separation of the Banking and Other Financial Service Industries | 505 | ||
| Erosion of Glass-Steagall | 505 | ||
| The Gramm-Leach-Bliley Financial Services Modernization Act of 1999: Repeal of Glass-Steagall | 506 | ||
| Implications for Financial Consolidation | 506 | ||
| Mini-Case: The Global Financial Crisis and the Demise of Large, Free-Standing Investment Banks | 507 | ||
| Separation of Banking and Other Financial Services Industries Throughout the World | 507 | ||
| Thrift Industry | 508 | ||
| Savings and Loan Associations | 508 | ||
| Mutual Savings Banks | 508 | ||
| Credit Unions | 509 | ||
| International Banking | 509 | ||
| Eurodollar Market | 510 | ||
| Structure of U.S. Banking Overseas | 510 | ||
| Foreign Banks in the United States | 511 | ||
| Summary | 512 | ||
| Key Terms | 513 | ||
| Questions | 513 | ||
| Web Exercises | 514 | ||
| Chapter 20: The Mutual Fund Industry | 515 | ||
| Preview | 515 | ||
| The Growth of Mutual Funds | 516 | ||
| The First Mutual Funds | 516 | ||
| Benefits of Mutual Funds | 516 | ||
| Ownership of Mutual Funds | 517 | ||
| Mutual Fund Structure | 520 | ||
| Open- Versus Closed-End Funds | 520 | ||
| Case: Calculating a Mutual Fund’s Net Asset Value | 521 | ||
| Organizational Structure | 522 | ||
| Investment Objective Classes | 522 | ||
| Equity Funds | 522 | ||
| Bond Funds | 524 | ||
| Hybrid Funds | 525 | ||
| Money Market Funds | 525 | ||
| Index Funds | 527 | ||
| Fee Structure of Investment Funds | 528 | ||
| Regulation of Mutual Funds | 529 | ||
| Hedge Funds | 530 | ||
| Mini-Case: The Long Term Capital Debacle | 532 | ||
| Conflicts of Interest in the Mutual Fund Industry | 533 | ||
| Sources of Conflicts of Interest | 533 | ||
| Mutual Fund Abuses | 533 | ||
| Conflicts of Interest: Many Mutual Funds Are Caught Ignoring Ethical Standards | 534 | ||
| Conflicts of Interest: SEC Survey Reports Mutual Fund Abuses Widespread | 535 | ||
| Government Response to Abuses | 536 | ||
| Summary | 537 | ||
| Key Terms | 537 | ||
| Questions | 537 | ||
| Quantitative Problems | 538 | ||
| Web Exercises | 539 | ||
| Chapter 21: Insurance Companies and Pension Funds | 540 | ||
| Preview | 540 | ||
| Insurance Companies | 541 | ||
| Fundamentals of Insurance | 541 | ||
| Adverse Selection and Moral Hazard in Insurance | 542 | ||
| Selling Insurance | 543 | ||
| Mini-Case: Insurance Agent: The Customer’s Ally | 543 | ||
| Growth and Organization of Insurance Companies | 544 | ||
| Types of Insurance | 544 | ||
| Life Insurance | 545 | ||
| Health Insurance | 549 | ||
| Property and Casualty Insurance | 551 | ||
| Insurance Regulation | 552 | ||
| The Practicing Manager: Insurance Management | 553 | ||
| Screening | 553 | ||
| Risk-Based Premium | 554 | ||
| Restrictive Provisions | 554 | ||
| Prevention of Fraud | 554 | ||
| Cancellation of Insurance | 555 | ||
| Deductibles | 555 | ||
| Coinsurance | 555 | ||
| Limits on the Amount of Insurance | 555 | ||
| Summary | 556 | ||
| Credit Default Swaps | 556 | ||
| Conflicts of Interest: The AIG Blowup | 557 | ||
| Pensions | 557 | ||
| Conflicts of Interest: The Subprime Financial Crisis and the Monoline Insurers | 558 | ||
| Types of Pensions | 558 | ||
| Defined-Benefit Pension Plans | 558 | ||
| Defined-Contribution Pension Plans | 559 | ||
| Private and Public Pension Plans | 560 | ||
| Mini-Case: Power to the Pensions | 560 | ||
| Regulation of Pension Plans | 564 | ||
| Employee Retirement Income Security Act | 564 | ||
| Individual Retirement Plans | 566 | ||
| The Future of Pension Funds | 566 | ||
| Summary | 567 | ||
| Key Terms | 567 | ||
| Questions | 567 | ||
| Quantitative Problems | 568 | ||
| Web Exercises | 569 | ||
| Chapter 22: Investment Banks, Security Brokers and Dealers, and Venture Capital Firms | 570 | ||
| Preview | 570 | ||
| Investment Banks | 571 | ||
| Background | 571 | ||
| Underwriting Stocks and Bonds | 572 | ||
| Equity Sales | 576 | ||
| Mergers and Acquisitions | 577 | ||
| Securities Brokers and Dealers | 578 | ||
| Brokerage Services | 579 | ||
| Securities Dealers | 581 | ||
| Mini-Case: Example of Using the Limit-Order Book | 582 | ||
| Regulation of Securities Firms | 582 | ||
| Relationship Between Securities Firms and Commercial Banks | 584 | ||
| Private Equity Investment | 584 | ||
| Venture Capital Firms | 584 | ||
| E-Finance: Venture Capitalists Lose Focus with Internet Companies | 589 | ||
| Private Equity Buyouts | 589 | ||
| Advantages to Private Equity Buyouts | 589 | ||
| Life Cycle of the Private Equity Buyout | 590 | ||
| Summary | 590 | ||
| Key Terms | 591 | ||
| Questions | 591 | ||
| Quantitative Problems | 592 | ||
| Web Exercises | 593 | ||
| Part Seven: The Management of Financial Institutions | 594 | ||
| Chapter 23: Risk Management in Financial Institutions | 594 | ||
| Preview | 594 | ||
| Managing Credit Risk | 595 | ||
| Screening and Monitoring | 595 | ||
| Long-Term Customer Relationships | 596 | ||
| Loan Commitments | 597 | ||
| Collateral | 597 | ||
| Compensating Balances | 598 | ||
| Credit Rationing | 598 | ||
| Managing Interest-Rate Risk | 599 | ||
| Income Gap Analysis | 600 | ||
| Duration Gap Analysis | 602 | ||
| Example of a Nonbanking Financial Institution | 607 | ||
| Some Problems with Income Gap and Duration Gap Analyses | 609 | ||
| The Practicing Manager: Strategies for Managing Interest-Rate Risk | 610 | ||
| Summary | 611 | ||
| Key Terms | 611 | ||
| Questions | 611 | ||
| Quantitative Problems | 612 | ||
| Web Exercises | 614 | ||
| Chapter 24: Hedging with Financial Derivatives | 615 | ||
| Preview | 615 | ||
| Hedging | 616 | ||
| Forward Markets | 616 | ||
| The Practicing Manager: Hedging Interest-Rate Risk with Forward Contracts | 616 | ||
| Interest-Rate Forward Contracts | 616 | ||
| Pros and Cons of Forward Contracts | 617 | ||
| Financial Futures Markets | 618 | ||
| Financial Futures Contracts | 618 | ||
| Following the Financial News: Financial Futures | 619 | ||
| The Practicing Manager: Hedging with Financial Futures | 620 | ||
| Organization of Trading in Financial Futures Markets | 622 | ||
| Globalization of Financial Futures Markets | 622 | ||
| Explaining the Success of Futures Markets | 623 | ||
| Mini-Case: The Hunt Brothers and the Silver Crash | 625 | ||
| The Practicing Manager: Hedging Foreign Exchange Risk with Forward and Futures Contracts | 626 | ||
| Hedging Foreign Exchange Risk with Forward Contracts | 626 | ||
| Hedging Foreign Exchange Risk with Futures Contracts | 627 | ||
| Stock Index Futures | 627 | ||
| Stock Index Futures Contracts | 628 | ||
| Following the Financial News: Stock Index Futures | 628 | ||
| The Practicing Manager: Hedging with Stock Index Futures | 629 | ||
| Options | 630 | ||
| Option Contracts | 630 | ||
| Profits and Losses on Option and Futures Contracts | 631 | ||
| Factors Affecting the Prices of Option Premiums | 634 | ||
| Summary | 635 | ||
| The Practicing Manager: Hedging with Futures Options | 635 | ||
| Interest-Rate Swaps | 637 | ||
| Interest-Rate Swap Contracts | 637 | ||
| The Practicing Manager: Hedging with Interest-Rate Swaps | 638 | ||
| Advantages of Interest-Rate Swaps | 639 | ||
| Disadvantages of Interest-Rate Swaps | 639 | ||
| Financial Intermediaries in Interest-Rate Swaps | 640 | ||
| Credit Derivatives | 640 | ||
| Credit Options | 641 | ||
| Credit Swaps | 641 | ||
| Credit-Linked Notes | 642 | ||
| Case: Lessons from the Global Financial Crisis: When Are Financial Derivatives Likely to Be a Worldwide Time Bomb? | 642 | ||
| Summary | 644 | ||
| Key Terms | 644 | ||
| Questions | 645 | ||
| Quantitative Problems | 645 | ||
| Web Exercise | 647 | ||
| Web Appendices | 647 | ||
| Glossary | 649 | ||
| Index | 667 | ||
| Back Cover | Back Cover |