Part I The Financial System 1
Chapter 1 An Overview of Financial Markets and Institutions 3
1.1 The Financial System 4
1.2 Financial Markets and Direct Financing 7
1.3 Types of Financial Markets 12
1.4 The Money Markets 14
1.5 The Capital Markets 15
1.6 Financial Intermediaries and Indirect Financing 17
1.7 Types of Financial Intermediaries 23
1.8 The Risks Financial Institutions Manage 28
1.9 Regulation of the Financial System 29
1.10 Ethics and the Financial System 33
Chapter 2 The Federal Reserve and Its Powers 38
2.1 Origins of the Federal Reserve System 39
2.2 The Current Structure of the Fed 44
2.3 Monetary Powers of the Board of Governors 47
2.4 The Fed's Regulatory Powers 47
2.5 Independence of the Fed 51
2.6 The Fed's Balance Sheet 53
2.7 The Fed's Role in Check Clearing and the Growth of Electronic Payments 59
2.8 Federal Reserve Tools of Monetary Policy 61
Chapter 3 The Fed and Interest Rates 71
3.1 Federal Reserve Control of the Money Supply 72
3.2 The Fed's Influence on Interest Rates 75
3.3 The Treasury Department and Fiscal Policy 79
3.4 Goals of Monetary Policy 82
3.5 The Fed and the Economy 88
3.6 Complications of Monetary Policy 91
3.7 Anatomy of a Financial Crisis 93
Part II How Interest Rates are Determined 105
Chapter 4 The Level of Interest Rates 107
4.1 What are Interest Rates? 108
4.2 The Real Rate of Interest 109
4.3 Loanable Funds Theory of Interest 111
4.4 Price Expectations and Interest Rates 114
4.5 A Restatement of the Fisher Equation 116
4.6 Forecasting Interest Rates 122
4.7 Interest Rates and Currency Values 124
Chapter 5 Bond Prices and Interest Rate Risk 127
5.1 The Time Value of Money 128
5.2 Bond Pricing 131
5.3 Bond Yields 136
5.4 Important Bond Pricing Relationships 140
5.5 Interest Rate Risk and Duration 144
Chapter 6 The Structure of Interest Rates 159
6.1 The Term Structure of Interest Rates 160
6.2 Default Risk 172
6.3 Tax Treatment 176
6.4 Marketability 180
6.5 Options on Debt Securities 180
6.6 Behavior of Interest Rates over the Business Cycle 183
Part III Financial Markets 189
Chapter 7 Money Markets 191
7.1 How the Money Markets Work 192
7.2 Economic Role of the Money Markets 193
7.3 Features of Money Market Instruments 194
7.4 Treasury Bills 194
7.5 Federal Agency Securities 201
7.6 Federal Funds 203
7.7 Other Major Money Market Instruments 205
7.8 Money Market Participants 211
7.9 The Impact of the 2007-2008 Financial Crisis on the Money Markets 213
Chapter 8 Bond Markets 220
8.1 Functions of the Capital Markets 221
8.2 The U.S. Government and Agency Securities 223
8.3 State and Local Government Bonds 227
8.4 Corporate Bonds 232
8.5 Financial Guarantees 237
8.6 Securitized Credit Instruments 238
8.7 Capital Market Regulators 240
8.8 Bond Markets Around the World are Increasingly Linked 241
8.9 The Impact of the 2007-2008 Financial Crisis on the Bond Markets 242
Chapter 9 Mortgage Markets and Mortgage?]Backed Securities 247
9.1 The Unique Nature of Mortgage Markets 249
9.2 Types of Mortgages 249
9.3 Mortgage Qualifying 257
9.4 Mortgage?]Backed Securities 261
9.5 Mortgage Prepayment Risk and Other MBS 265
9.6 Participants in the Mortgage Markets 271
9.7 Relationship Between Mortgage Markets and the Capital Markets 275
Chapter 10 Equity Markets 279
10.1 What are Equity Securities? 280
10.2 Equity Markets 282
10.3 Equity Trading 287
10.4 Global Stock Markets 291
10.5 Large-Scale and High Frequency Trading 292
10.6 Regulation of Equity Markets 294
10.7 Stock Market Indexes 295
Chapter 11 Derivatives Markets 300
11.1 The Nature of Derivative Securities 301
11.2 Forward Markets 302
11.3 Futures Markets 304
11.4 Uses of the Financial Futures Markets 311
11.5 Risks in the Futures Markets 318
11.6 Options Markets 319
11.7 Swap Markets 326
Chapter 12 International Markets 332
12.1 The Difficulties of International Trade 333
12.2 Exchange Rates 334
12.3 Balance of Payments 337
12.4 Foreign Exchange Markets 341
12.5 Spot and Forward Transactions 343
12.6 Capital Flows and Exchange Rates 346
12.7 Government Intervention in Foreign Exchange Markets 351
12.8 Financing International Trade 354
12.9 International Money and Capital Markets 355
12.10 The Globalization of Financial Markets 358
Part IV Commercial Banking 363
Chapter 13 Commercial Bank Operations 365
13.1 An Overview of the Banking Industry 366
13.2 Balance Sheet for a Commercial Bank 369
13.3 The Source of Bank Funds 370
13.4 Bank Uses of Funds: Bank Investments and Cash Assets 376
13.5 Bank Uses of Funds: Loans and Leases 378
13.6 Loan Pricing 381
13.7 Analysis of Loan Credit Risk 384
13.8 Fee?]Based Services 386
13.9 Off?]Balance?]Sheet Banking 387
13.10 Bank Earnings 392
13.11 Bank Performance 396
Chapter 14 International Banking 400
14.1 Development of International Banking 401
14.2 Regulation of Overseas Banking Activities 404
14.3 Delivery of Overseas Banking Services 406
14.4 International Lending 409
14.5 Foreign Banks in the United States 416
14.6 Future Directions of International Banking 420
Chapter 15 Regulation of Financial Institutions 422
15.1 Reasons for Regulation 423
15.2 Bank Failures and Regulation 426
15.3 Safety and Soundness Regulation: Deposit Insurance 432
15.4 Deposit Insurance Issues 435
15.5 Safety and Soundness Regulation: Capital Requirements 439
15.6 Bank Examinations 447
15.7 Structure and Competition Regulations 450
15.8 Consumer Protection Regulations 452
15.9 Bank Regulators 456
Part V Financial Institutions 463
Chapter 16 Thrift Institutions and Finance Companies 465
16.1 Historical Development of Savings Institutions 467
16.2 Operations of Savings Institutions 470
16.3 Credit Unions 478
16.4 Thrift Institutions Around the Globe 484
16.5 Finance Companies 486
Chapter 17 Insurance Companies and Pension Funds 496
17.1 Insurance 497
17.2 The Insurance Industry 501
17.3 Life and Health Insurance Products 508
17.4 Property and Liability Insurance Products 515
17.5 Pensions 519
Chapter 18 Investment Banking 527
18.1 The Relationship Between Commercial and Investment Banking 528
18.2 Primary Services of an Investment Bank 533
18.3 Private Equity 543
Chapter 19 Investment Companies 551
19.1 Investment Companies 552
19.2 Open?]End Mutual Funds 553
19.3 Closed?]End Mutual Funds 566
19.4 Exchange?]Traded Funds 567
19.5 Hedge Funds 572
19.6 Real Estate Investment Trusts 576
Chapter 20 Risk Management in Financial Institutions 580
20.1 The Dilemma: Profitability Versus Safety 581
20.2 Liquidity Management 583
20.3 Managing Credit Risk 587
20.4 Measuring and Assessing Interest Rate Risk 593
20.5 Hedging Interest Rate Risk 602
Summary of Learning Objectives 611
Key Terms 612
Questions and Problems 612
Glossary 613
Index 637
