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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 |