Financial Markets And Institutions

by Mishkin, Frederic S.; Eakins, Stanley

• ISBN13: 9780321280299
• ISBN10: 0321280296
• Edition: 6th
• Format: Hardcover
• Copyright: 2009-01-01
• Publisher: Addison Wesley

Summary

Recognizing that students need more than an abstract description of financial markets and institutions as they train to become managers successfully working in, or interacting with, the financial service industry, Mishkin and Eakins examine models and concepts through the eyes of a practicing financial manager to see not onlywhy they matter, but also how they are used in the real world. In this way, students learn to place themselves in the role of decision-maker and envision how they might respond to problems and situations that will arise in their future careers.This Fifth Edition boasts expanded coverage of valuation concepts, more quantitative material, and a streamlined, finance-focused presentation. A careful examination of conflicts of interest, a concentration on the impact of new technologies, new data, and refreshing examples all serve to enhance and illuminate important concepts.

Table of Contents

Preface	xxix
About the Authors	xxxix
PART ONE INTRODUCTION	1	(38)
Why Study Financial Markets and Institutions?	3	(14)
Preview	3	(1)
Why Study Financial Markets?	3	(4)
Debt Markets and Interest Rates	4	(1)
The Stock Market	5	(1)
The Foreign Exchange Market	6	(1)
Why Study Financial Institutions?	7	(2)
Central Banks and the Conduct of Monetary Policy	8	(1)
Structure of the Financial System	8	(1)
Banks and Other Financial Institutions	8	(1)
Financial Innovation	9	(1)
Managing Risk in Financial Institutions	9	(1)
Applied Managerial Perspective	9	(1)
How We Will Study Financial Markets and Institutions	10	(3)
Exploring the Web	11	(1)
Web Exercise	11	(2)
Concluding Remarks	13	(1)
Summary	14	(1)
Key Terms	14	(1)
Questions	14	(1)
Quantitative Problems	15	(2)
Overview of the Financial System	17	(22)
Preview	17	(1)
Function of Financial Markets	18	(2)
Structure of Financial Markets	20	(2)
Debt and Equity Markets	20	(1)
Primary and Secondary Markets	20	(1)
Exchanges and Over-the-Counter Markets	21	(1)
Money and Capital Markets	22	(1)
Internationalization of Financial Markets	22	(1)
International Bond Market, Eurobonds, and Eurocurrencies	22	(1)
World Stock Markets	23	(1)
Function of Financial Intermediaries	23	(1)
The Wall Street Journal: Following the News Foreign Stock Market Indexes	24	(1)
Global The Importance of Financial Intermediaries to Securities Markets: An International Comparison	25	(3)
Transaction Costs	25	(1)
Risk Sharing	26	(1)
Asymmetric Information: Adverse Selection and Moral Hazard	26	(2)
Financial Intermediaries	28	(4)
Depository Institutions	29	(1)
Contractual Savings Institutions	30	(1)
Investment Intermediaries	31	(1)
Regulation of the Financial System	32	(3)
Increasing Information Available to Investors	32	(1)
Ensuring the Soundness of Financial Intermediaries	33	(2)
Improving Control of Monetary Policy	35	(1)
Financial Regulation Abroad	35	(1)
Summary	35	(1)
Key Terms	36	(1)
Questions	36	(1)
Web Exercises: Overview of the Financial System	37	(2)
PART TWO FUNDAMENTALS OF FINANCIAL MARKETS	39	(110)
What Do Interest Rates Mean and What Is Their Role in Valuation?	41	(30)
Preview	41	(1)
Measuring Interest Rates	42	(10)
Present Value	42	(2)
Four Types of Credit Market Instruments	44	(1)
Yield to Maturity	45	(7)
Global Negative T-Bill Rates? Japan Shows the Way	52	(1)
The Distinction Between Real and Nominal Interest Rates	52	(3)
The Distinction Between Interest Rates and Returns	55	(1)
Mini-Case With TIPS, Real Interest Rates Have Become Observable in the United States	56	(3)
Maturity and the Volatility of Bond Returns: Interest-Rate Risk	59	(1)
Mini-Case Helping Investors Select Desired Interest-Rate Risk	59	(2)
Reinvestment Risk	60	(1)
Summary	60	(1)
The Practicing Manager Calculating Duration to Measure Interest-Rate Risk	61	(7)
Summary	68	(1)
Key Terms	68	(1)
Questions	68	(1)
Quantitative Problems	69	(1)
Web Exercises: Understanding Interest Rates	70	(1)
Why Do Interest Rates Change?	71	(30)
Preview	71	(1)
Determinants of Asset Demand	71	(4)
Wealth	72	(1)
Expected Returns	72	(1)
Risk	73	(2)
Liquidity	75	(1)
Summary	75	(1)
Supply and Demand in the Bond Market	75	(6)
Demand Curve	76	(2)
Supply Curve	78	(1)
Market Equilibrium	78	(1)
Supply and Demand Analysis	79	(1)
Loanable Funds Framework	79	(2)
Changes in Equilibrium Interest Rates	81	(6)
Shifts in the Demand for Bonds	81	(4)
Shifts in the Supply of Bonds	85	(2)
Case Changes in the Equilibrium Interest Rate Due to Expected Inflation or Business Cycle Expansions	87	(4)
Case Explaining Low Japanese Interest Rates	91	(1)
Case: The Wall Street Journal The ``Credit Markets'' Column	92	(1)
The Wall Street Journal: Following the News The ``Credit Markets'' Column	93	(1)
The Practicing Manager Profiting from Interest-Rate Forecasts	94	(1)
The Wall Street Journal: Following the News Forecasting Interest Rates	95	(1)
Summary	96	(1)
Key Terms	97	(1)
Questions	97	(1)
Quantitative Problems	98	(1)
Web Exercises: The Behavior of Interest Rates	99
Appendix 1: Models of Asset Pricing	13	(10)
Appendix 2: Applying the Asset Market Approach to a Commodity Market: The Case of Gold	23	(4)
Appendix 3: Supply and Demand in the Market for Money: The Liquidity Preference Framework	27	(74)
How Do Risk and Term Structure Affect Interest Rates?	101	(30)
Preview	101	(1)
Risk Structure of Interest Rates	101	(4)
Default Risk	102	(3)
Case The Enron Bankruptcy and the Baa-Aaa Spread	105	(1)
Case What If Treasury Securities Were No Longer Default-Free?	106	(4)
Liquidity	106	(1)
Income Tax Considerations	107	(2)
Summary	109	(1)
Case Effects of the Bush Tax Cut on Bond Interest Rates	110	(1)
Term Structure of Interest Rates	110	(1)
The Wall Street Journal: Following the News Yield Curves	111	(11)
Pure Expectations Theory	111	(5)
Market Segmentation Theory	116	(1)
Liquidity Premium Theory	117	(3)
Evidence on the Term Structure	120	(1)
Summary	121	(1)
Case Interpreting Yield Curves, 1980--2004	122	(1)
The Practicing Manager Using the Term Structure to Forecast Interest Rates	123	(3)
Summary	126	(1)
Key Terms	127	(1)
Questions	127	(1)
Quantitative Problems	128	(1)
Web Exercises: The Risk and Term Structure of Interest Rates	129	(2)
Are Financial Markets Efficient?	131	(18)
Preview	131	(1)
The Efficient Market Hypothesis	132	(3)
Rationale Behind the Hypothesis	134	(1)
Stronger Version of the Efficient Market Hypothesis	135	(1)
Evidence on the Efficient Market Hypothesis	135	(2)
Evidence in Favor of Market Efficiency	135	(2)
Mini-Case An Exception That Proves the Rule: Ivan Boesky	137	(2)
Case Should Foreign Exchange Rates Follow a Random Walk?	139	(3)
Evidence Against Market Efficiency	139	(2)
Overview of the Evidence on the Efficient Market Hypothesis	141	(1)
The Practicing Manager Practical Guide to Investing in the Stock Market	142	(1)
Mini-Case Should You Hire an Ape as Your Investment Adviser?	142	(3)
Case What Do the Black Monday Crash of 1987 and the Tech Crash of 2000 Tell Us About the Efficient Market Hypothesis?	145	(1)
Behavioral Finance	146	(1)
Summary	147	(1)
Key Terms	147	(1)
Questions	147	(1)
Quantitative Problems	148	(1)
Web Exercises: The Efficient Market Hypothesis	148	(1)
PART THREE CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY	149	(68)
Structure of Central Banks and the Federal Reserve System	151	(24)
Preview	151	(1)
Origins of the Federal Reserve System	151	(1)
Inside the Fed The Political Genius of the Founders of the Federal Reserve System	152	(1)
Formal Structure of the Federal Reserve System	153	(2)
Federal Reserve Banks	154	(1)
Inside the Fed Special Role of the Federal Reserve Bank of New York	155	(3)
Member Banks	156	(1)
Board of Governors of the Federal Reserve System	157	(1)
Inside the Fed Role of the Research Staff	158	(2)
Federal Open Market Committee (FOMC)	158	(1)
The FOMC Meeting	159	(1)
Inside the Fed Green, Blue, and Beige: What Do These Colors Mean at the Fed?	160	(1)
Informal Structure of the Federal Reserve System	161	(1)
Inside the Fed Role of Member Banks in the Federal Reserve System	162	(1)
How Independent Is the Fed?	163	(2)
Structure and Independence of Foreign Central Banks	165	(3)
Bank of Canada	165	(1)
Bank of England	166	(1)
Bank of Japan	166	(1)
European Central Bank	167	(1)
The Trend Toward Greater Independence	167	(1)
Explaining Central Bank Behavior	168	(1)
Inside the Fed Federal Reserve Transparency	168	(1)
Should the Fed Be Independent?	169	(2)
The Case for Independence	169	(1)
The Case Against Independence	170	(1)
Central Bank Independence and Macroeconomic Performance Throughout the World	171	(1)
Summary	172	(1)
Key Terms	172	(1)
Questions	172	(1)
Web Exercises: Structure of Central Banks and the Federal Reserve System	173	(2)
Conduct of Monetary Policy: Tools, Goals, and Targets	175	(42)
Preview	175	(1)
The Federal Reserve's Balance Sheet	175	(4)
Liabilities	175	(2)
Assets	177	(1)
Open Market Operations	177	(1)
Discount Lending	178	(1)
The Market for Reserves and the Federal Funds Rate	179	(4)
Supply and Demand in the Market for Reserves	179	(1)
How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate	180	(3)
Tools of Monetary Policy	183	(6)
Open Market Operations	183	(1)
A Day at the Trading Desk	184	(1)
Discount Policy	185	(1)
Operation of the Discount Window	185	(2)
Lender of Last Resort	187	(1)
Reserve Requirements	188	(1)
Advantages of Open Market Operations Over the Other Tools	188	(1)
Inside the Fed Discounting to Prevent a Financial Panic: The Black Monday Stock Market Crash of October 1987 and the Terrorist Destruction of the World Trade Center in September 2001	189	(1)
Goals of Monetary Policy	190	(2)
High Employment	190	(1)
Economic Growth	191	(1)
Price Stability	191	(1)
Global The Growing European Commitment to Price Stability	192	(1)
Interest-Rate Stability	192	(1)
Stability of Financial Markets	192	(1)
Stability in Foreign Exchange Markets	193	(1)
Conflict Among Goals	193	(1)
Central Bank Strategy: Use of Targets	193	(2)
Choosing the Targets	195	(3)
Criteria for Choosing Intermediate Targets	197	(1)
Criteria for Choosing Operating Targets	198	(1)
Fed Policy Procedures: Historical Perspective	198	(3)
The Early Years: Discount Policy as the Primary Tool	199	(1)
Discovery of Open Market Operations	199	(1)
The Great Depression	200	(1)
War Finance and the Pegging of Interest Rates: 1942--1951	200	(1)
Inside the Fed Bank Panics of 1930--1933: Why Did the Fed Let Them Happen?	201	(4)
Targeting Monetary Market Conditions: The 1950s and 1960s	201	(1)
Targeting Monetary Aggregates: The 1970s	201	(2)
New Fed Operating Procedures: October 1979--October 1982	203	(1)
Deemphasis of Monetary Aggregates: October 1982--Early 1990s	204	(1)
Federal Funds Targeting Again: Early 1990s and Beyond	204	(1)
International Considerations	205	(1)
Global International Policy Coordination: The Plaza Agreement and the Louvre Accord	206	(1)
Monetary Targeting in Other Countries	206	(3)
United Kingdom	207	(1)
Canada	207	(1)
Germany	208	(1)
Japan	208	(1)
Lessons from Monetary Targeting Experiences	209	(1)
The New International Trend in Monetary Policy Strategy: Inflation Targeting	209	(3)
New Zealand	210	(1)
Canada	210	(1)
United Kingdom	211	(1)
Lessons from Inflation Targeting Experience	211	(1)
The Practicing Manager Using a Fed Watcher	212	(1)
Summary	213	(1)
Key Terms	214	(1)
Questions	214	(1)
Quantitative Problems	215	(1)
Web Exercises: Conduct of Monetary Policy: Tools, Goals, and Targets	215
Appendix: The Fed's Balance Sheet and the Monetary Base	39	(178)
PART FOUR FINANCIAL MARKETS	217	(152)
The Money Markets	219	(26)
Preview	219	(1)
The Money Markets Defined	219	(1)
Why Do We Need the Money Markets?	220	(1)
Money Market Cost Advantages	221	(1)
The Purpose of the Money Markets	221	(1)
Who Participates in the Money Markets?	222	(3)
U.S. Treasury Department	223	(1)
Federal Reserve System	223	(1)
Commercial Banks	224	(1)
Businesses	224	(1)
Investment and Securities Firms	224	(1)
Individuals	225	(1)
Money Market Instruments	225	(1)
Treasury Bills	225	(1)
Case Discounting the Price of Treasury Securities to Pay the Interest	226	(2)
Mini-Case Treasury Bill Auctions Go Haywire	228	(9)
Federal Funds	229	(1)
Repurchase Agreements	230	(1)
Negotiable Certificates of Deposit	231	(1)
Commercial Paper	232	(3)
Banker's Acceptances	235	(2)
Eurodollars	237	(1)
Global Ironic Birth of the Eurodollar Market	237	(1)
Comparing Money Market Securities	238	(2)
Interest Rates	238	(1)
Liquidity	239	(1)
How Money Market Securities Are Valued	239	(1)
The Wall Street Journal: Following The News Money Market Rates	240	(1)
Summary	241	(1)
Key Terms	242	(1)
Questions	242	(1)
Quantitative Problems	242	(1)
Web Exercises: The Money Markets	243	(2)
The Bond Market	245	(28)
Preview	245	(1)
Purpose of the Capital Market	245	(1)
Capital Market Participants	246	(1)
Capital Market Trading	246	(1)
Types of Bonds	247	(1)
Treasury Bonds	247	(4)
Treasury Bond Interest Rates	248	(1)
Treasury Inflation-Indexed Securities	248	(2)
Treasury Strips	250	(1)
Agency Bonds	250	(1)
Municipal Bonds	251	(1)
Risk in the Municipal Bond Market	252	(1)
Corporate Bonds	252	(6)
Characteristics of Corporate Bonds	253	(2)
Types of Corporate Bonds	255	(3)
Financial Guarantees for Bonds	258	(1)
Bond Yield Calculations	258	(3)
Current Yield	258	(2)
Yield on a Discount Basis	260	(1)
Case: The Wall Street Journal The Bond Page	261	(1)
The Wall Street Journal: Following the News Treasury Bonds and Notes	262	(1)
The Wall Street Journal: Following the News Treasury Bills	263	(1)
The Wall Street Journal: Following the News Corporate Bonds	264	(1)
Finding the Value of Coupon Bonds	265	(3)
Finding the Price of Semiannual Bonds	265	(3)
Investing in Bonds	268	(1)
Summary	269	(1)
Key Terms	269	(1)
Questions	269	(1)
Quantitative Problems	270	(1)
Web Exercise: The Bond Market	271	(2)
The Stock Market	273	(22)
Preview	273	(1)
Investing in Stocks	273	(2)
Common Stock Versus Preferred Stock	274	(1)
How Stocks Are Sold	275	(1)
Mini-Case The Most Expensive Seat in Town	275	(3)
Computing the Price of Common Stock	278	(1)
Mini-Case Nasdaq: Fighting for Its Life Against ECNs	279	(1)
The One-Period Valuation Model	279	(1)
The Wall Street Journal: Following the News Stock Prices	280	(4)
The Generalized Dividend Valuation Model	281	(1)
The Gordon Growth Model	281	(2)
Price Earnings Valuation Method	283	(1)
How the Market Sets Security Prices	284	(1)
Errors in Valuation	285	(2)
Problems with Estimating Growth	285	(1)
Problems with Estimating Risk	286	(1)
Problems with Forecasting Dividends	286	(1)
Case The September 11 Terrorist Attack, the Enron Scandal, and the Stock Market	287	(1)
Stock Market Indexes	287	(1)
Mini-Case History of the Dow Jones Industrial Average	288	(1)
Buying Foreign Stocks	288	(2)
Regulation of the Stock Market	290	(1)
The Securities and Exchange Commission	290	(1)
Summary	291	(1)
Key Terms	292	(1)
Questions	292	(1)
Quantitative Problems	292	(1)
Web Exercises: The Stock Market	293	(2)
The Mortgage Markets	295	(22)
Preview	295	(1)
What Are Mortgages?	296	(1)
Characteristics of the Residential Mortgage	297	(1)
Mortgage Interest Rates	297	(1)
Case The Discount Point Decision	298	(3)
Loan Terms	299	(2)
Mortgage Loan Amortization	301	(1)
Case Computing the Payment on Mortgage Loans	301	(2)
Types of Mortgage Loans	303	(3)
Insured and Conventional Mortgages	303	(1)
Fixed- and Adjustable-Rate Mortgages	304	(1)
Other Types of Mortgages	304	(2)
Mortgage-Lending Institutions	306	(1)
Loan Servicing	307	(1)
E-Finance Borrowers Shop the Web for Mortgages	308	(1)
Secondary Mortgage Market	308	(1)
Securitization of Mortgages	309	(1)
What Is a Mortgage-Backed Security?	309	(1)
Mini-Case Are Fannie Mae and Freddie Mac Getting Too Big for Their Britches?	310	(2)
Types of Pass-Through Securities	310	(2)
Mortgage-Backed Securities Clearing Corporation	312	(1)
The Impact of Securitized Mortgages on the Mortgage Market	312	(1)
Summary	313	(1)
Key Terms	313	(1)
Questions	314	(1)
Quantitative Problems	314	(2)
Web Exercises: The Mortgage Markets	316	(1)
The Foreign Exchange Market	317	(30)
Preview	317	(1)
Foreign Exchange Market	318	(2)
What Are Foreign Exchange Rates?	319	(1)
Why Are Exchange Rates Important?	319	(1)
The Wall Street Journal: Following the News Foreign Exchange Rates	320	(1)
How Is Foreign Exchange Traded?	321	(1)
Exchange Rates in the Long Run	321	(4)
Law of One Price	321	(1)
Theory of Purchasing Power Parity	322	(1)
Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates	323	(1)
Factors That Affect Exchange Rates in the Long Run	323	(2)
Exchange Rates in the Short Run	325	(6)
Comparing Expected Returns on Domestic and Foreign Deposits	326	(2)
Interest Parity Condition	328	(1)
Equilibrium in the Foreign Exchange Market	329	(2)
Explaining Changes in Exchange Rates	331	(3)
Shifts in the Expected-Return Schedule for Foreign Deposits	331	(2)
Shifts in the Expected-Return Schedule for Domestic Deposits	333	(1)
Case Changes in the Equilibrium Exchange Rate: Two Examples	334	(4)
Changes in the Money Supply	336	(1)
Exchange Rate Overshooting	337	(1)
Case Why Are Exchange Rates So Volatile?	338	(1)
Case Explaining the Rise and Fall of the Dollar in the 1980s	339	(2)
Case The Euro's First Six Years	341	(1)
Case: The Wall Street Journal The ``Currency Trading'' Column	341	(1)
The Practicing Manager Profiting from Foreign Exchange Forecasts	342	(1)
The Wall Street Journal: Following the News The ``Currency Trading'' Column	343	(1)
Summary	344	(1)
Key Terms	344	(1)
Questions	344	(1)
Quantitative Problems	345	(1)
Web Exercises: The Foreign Exchange Market	346	(1)
The International Financial System	347	(22)
Preview	347	(1)
Intervention in the Foreign Exchange Market	347	(1)
Foreign Exchange Intervention and the Money Supply	347	(1)
Inside the Fed A Day at the Federal Reserve Bank of New York's Foreign Exchange Desk	348	(4)
Unsterilized Intervention	350	(1)
Sterilized Intervention	351	(1)
Balance of Payments	352	(1)
Exchange Rate Regimes in the International Financial System	353	(1)
Fixed Exchange Rate Regimes	353	(1)
Global The Euro's Challenge to the Dollar	354	(2)
Case The Foreign Exchange Crisis of September 1992	356	(1)
Global Argentina's Currency Board	357	(1)
Global Dollarization	358	(1)
The Practicing Manager Profiting from a Foreign Exchange Crisis	359	(1)
Case Recent Foreign Exchange Crises in Emerging Market Countries: Mexico 1994, East Asia 1997, Brazil 1999, and Argentina 2002	360	(2)
Managed Float	361	(1)
Capital Controls	362	(1)
Controls on Capital Outflows	362	(1)
Controls on Capital Inflows	363	(1)
The Role of the IMF	363	(3)
Should the IMF Be an International Lender of Last Resort?	364	(2)
Summary	366	(1)
Key Terms	367	(1)
Questions	367	(1)
Quantitative Problems	368	(1)
Web Exercises: The International Financial System	368
Appendix: Balance of Payments	45	(324)
PART FIVE FUNDAMENTALS OF FINANCIAL INSTITUTIONS	369	(54)
Why Do Financial Institutions Exist?	371	(32)
Preview	371	(1)
Basic Facts About Financial Structure Throughout the World	371	(4)
Transaction Costs	375	(1)
How Transaction Costs Influence Financial Structure	375	(1)
How Financial Intermediaries Reduce Transaction Costs	375	(1)
Asymmetric Information: Adverse Selection and Moral Hazard	376	(1)
The Lemons Problem: How Adverse Selection Influences Financial Structure	377	(3)
Lemons in the Stock and Bond Markets	378	(1)
Tools to Help Solve Adverse Selection Problems	378	(2)
Conflicts of Interest The Enron Implosion	380	(3)
How Moral Hazard Affects the Choice Between Debt and Equity Contracts	383	(1)
Moral Hazard in Equity Contracts: The Principal-Agent Problem	383	(1)
Tools to Help Solve the Principal-Agent Problem	384	(1)
Conflicts of Interest ``Hollywood Accounting'': Was Forrest Gump a Money Loser?	384	(2)
How Moral Hazard Influences Financial Structure in Debt Markets	386	(4)
Tools to Help Solve Moral Hazard in Debt Contracts	387	(2)
Summary	389	(1)
Case Financial Development and Economic Growth	390	(1)
Financial Crises and Aggregate Economic Activity	391	(3)
Factors Causing Financial Crises	391	(3)
Case Financial Crises in the United States	394	(2)
Mini-Case Case Study of a Financial Crisis: The Great Depression	396	(1)
Case Financial Crises in Emerging Market Countries: Mexico, 1994--1995, East Asia, 1997--1998, and Argentina, 2001--2002	396	(4)
Summary	400	(1)
Key Terms	401	(1)
Questions	401	(1)
Quantitative Problems	401	(1)
Web Exercises: Why Do Financial Institutions Exist?	402	(1)
What Should Be Done About Conflicts of Interest in the Financial Industry?	403	(20)
Preview	403	(1)
What Are Conflicts of Interest and Why Are They Important?	404	(1)
Ethics and Conflicts of Interest	405	(1)
Types of Conflicts of Interest	405	(1)
Underwriting and Research in Investment Banking	405	(1)
Conflicts of Interest The King, Queen, and Jack of the Internet	406	(1)
Conflicts of Interest Frank Quattrone and Spinning	407	(1)
Auditing and Consulting in Accounting Firms	407	(1)
Credit Assessment and Consulting in Credit-Rating Agencies	407	(1)
Conflicts of Interest The Demise of Arthur Andersen	408	(1)
Universal Banking	408	(1)
Mini-Case Why Do Issuers of Securities Pay to Have Their Securities Rated?	409	(1)
When Are Conflicts of Interest a Serious Problem?	409	(1)
Conflicts of Interest Banksters	410	(2)
What Has Been Done to Remedy Conflicts of Interest?	412	(2)
Sarbanes-Oxley Act of 2002	413	(1)
Global Legal Settlement of 2002	413	(1)
A Framework for Evaluating Policies to Remedy Conflicts of Interest	414	(3)
Approaches to Remedying Conflicts of Interest	415	(2)
Case Evaluating Sarbanes-Oxley and the Global Settlement	417	(2)
Summary	419	(1)
Key Terms	420	(1)
Questions	420	(1)
Quantitative Problems	420	(1)
Web Exercises: What Should Be Done About Conflicts of Interest in the Financial Industry?	421	(2)
PART SIX THE FINANCIAL INSTITUTIONS INDUSTRY	423	(192)
Banking and the Management of Financial Institutions	425	(26)
Preview	425	(1)
The Bank Balance Sheet	425	(4)
Liabilities	426	(2)
Assets	428	(1)
Basics of Banking	429	(2)
General Principles of Bank Management	431	(7)
Liquidity Management and the Role of Reserves	432	(2)
Asset Management	434	(1)
Liability Management	435	(1)
Capital Adequacy Management	436	(2)
The Practicing Manager Strategies for Managing Bank Capital	438	(1)
Case Did the Capital Crunch Cause a Credit Crunch in the Early 1990s?	439	(1)
Off-Balance-Sheet Activities	440	(2)
Loan Sales	440	(1)
Generation of Fee Income	440	(1)
Trading Activities and Risk Management Techniques	441	(1)
Conflicts of Interest Barings, Daiwa, and Sumitomo: Rogue Traders and the Principal-Agent Problem	442	(1)
Measuring Bank Performance	443	(4)
Bank's Income Statement	443	(2)
Measures of Bank Performance	445	(1)
Recent Trends in Bank Performance Measures	446	(1)
Summary	447	(1)
Key Terms	448	(1)
Questions	448	(1)
Quantitative Problems	449	(1)
Web Exercises: Banking and the Management of Financial Institutions	450	(1)
Commercial Banking Industry: Structure and Competition	451	(34)
Preview	451	(1)
Historical Development of the Banking System	451	(3)
Multiple Regulatory Agencies	453	(1)
Financial Innovation and the Evolution of the Banking Industry	454	(4)
Responses to Changes in Demand Conditions	455	(1)
Responses to Changes in Supply Conditions	456	(2)
E-Finance Will ``Clicks'' Dominate ``Bricks'' in the Banking Industry?	458	(1)
E-Finance Why Are Scandinavians so Far Ahead of Americans in Using Electronic Payments and On-Line Banking?	459	(1)
E-Finance Are We Headed for a Cashless Society?	460	(4)
Avoidance of Existing Regulations	461	(3)
The Practicing Manager Profiting from a New Financial Product: A Case Study of Treasury Strips	464	(5)
Financial Innovation and the Decline of Traditional Banking	466	(3)
Structure of the U.S. Commercial Banking Industry	469	(3)
Restrictions on Branching	470	(1)
Response to Branching Restrictions	471	(1)
Bank Consolidation and Nationwide Banking	472	(2)
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994	474	(1)
E-Finance Information Technology and Bank Consolidation	474	(2)
What Will the Structure of the U.S. Banking Industry Look Like in the Future?	475	(1)
Are Bank Consolidation and Nationwide Banking Good Things?	475	(1)
Global Comparison of Banking Structures in the United States and Abroad	476	(1)
Separation of Banking and Other Financial Service Industries	477	(2)
Erosion of Glass-Steagall	477	(1)
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999: Repeal of Glass-Steagall	477	(1)
Implications for Financial Consolidation	478	(1)
Separation of Banking and Other Financial Services Industries Throughout the World	478	(1)
International Banking	479	(3)
Eurodollar Market	479	(1)
Structure of U.S. Banking Overseas	480	(1)
Foreign Banks in the United States	481	(1)
Summary	482	(1)
Key Terms	483	(1)
Questions	483	(1)
Web Exercises: Commercial Banking Industry: Structure and Competition	484	(1)
Savings Associations and Credit Unions	485	(28)
Preview	485	(1)
Mutual Savings Banks	485	(1)
Savings and Loan Associations	486	(2)
Mutual Savings Banks and Savings and Loans Compared	488	(1)
Savings and Loans in Trouble: The Thrift Crisis	488	(2)
Later Stages of the Crisis: Regulatory Forbearance	489	(1)
Competitive Equality in Banking Act of 1987	490	(1)
Political Economy of the Savings and Loan Crisis	490	(2)
Principal-Agent Problem for Regulators and Politicians	491	(1)
Case Principal-Agent Problem in Action: Charles Keating and the Lincoln Savings and Loan Scandal	492	(1)
Savings and Loan Bailout: Financial Institutions Reform, Recovery, and Enforcement Act of 1989	493	(1)
The Savings and Loan Industry Today	494	(7)
Number of Institutions	494	(2)
S&L Size	496	(1)
S&L Assets	497	(1)
S&L Liabilities and Net Worth	497	(1)
Capital	498	(1)
Profitability and Health	498	(2)
The Future of the Savings and Loan Industry	500	(1)
Credit Unions	501	(9)
History and Organization	501	(5)
Sources of Funds	506	(1)
Uses of Funds	507	(1)
Advantages and Disadvantages of Credit Unions	508	(1)
The Future of Credit Unions	509	(1)
Summary	510	(1)
Key Terms	510	(1)
Questions	510	(1)
Web Exercises: Savings Associations and Credit Unions	511	(2)
Banking Regulation	513	(24)
Preview	513	(1)
Asymmetric Information and Bank Regulation	513	(2)
Government Safety Net: Deposit Insurance and the FDIC	513	(2)
Global The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing?	515	(4)
Restrictions on Asset Holdings and Bank Capital Requirements	517	(2)
Mini-Case Basel 2: Is It Spinning Out of Control?	519	(4)
Bank Supervision: Chartering and Examination	519	(1)
A New Trend in Bank Supervision: Assessment of Risk Management	520	(1)
Disclosure Requirements	521	(1)
Consumer Protection	522	(1)
Restrictions on Competition	522	(1)
E-Finance Electronic Banking: New Challenges for Bank Regulation	523	(1)
International Banking Regulation	523	(3)
Problems in Regulating International Banking	525	(1)
Summary	525	(1)
The 1980s U.S. Banking Crisis	526	(1)
Federal Deposit Insurance Corporation Improvement Act of 1991	527	(1)
Banking Crises Throughout the World	528	(6)
Scandinavia	529	(1)
Latin America	530	(1)
Russia and Eastern Europe	531	(1)
Japan	531	(2)
China	533	(1)
East Asia	533	(1)
``Deja Vu All Over Again''	534	(1)
Summary	534	(1)
Key Terms	534	(1)
Questions	535	(1)
Quantitative Problems	535	(1)
Web Exercises: Banking Regulation	536
Appendix: Evaluating FDICIA and Other Proposed Reforms of the Banking Regulatory System	49	(488)
The Mutual Fund Industry	537	(24)
Preview	537	(1)
The Growth of Mutual Funds	537	(4)
The First Mutual Funds	538	(1)
Benefits of Mutual Funds	538	(1)
Ownership of Mutual Funds	539	(2)
Mutual Fund Structure	541	(2)
Open- Versus Closed-End Funds	542	(1)
Organizational Structure	542	(1)
Case Calculating a Mutual Fund's Net Asset Value	543	(1)
Investment Objective Classes	544	(5)
Equity Funds	544	(1)
Bond Funds	545	(1)
Hybrid Funds	546	(1)
Money Market Funds	546	(2)
Index Funds	548	(1)
Fee Structure of Investment Funds	549	(1)
Regulation of Mutual Funds	550	(1)
Hedge Funds	551	(2)
Mini-Case The Long Term Capital Debacle	553	(1)
Conflicts of Interest in the Mutual Fund Industry	554	(1)
Sources of Conflicts of Interest	554	(1)
Mutual Fund Abuses	554	(1)
Conflicts of Interest Many Mutual Funds Are Caught Ignoring Ethical Standards	555	(2)
Government Response to Abuses	556	(1)
Conflicts of Interest SEC Survey Reports Mutual Fund Abuses Widespread	557	(1)
Summary	558	(1)
Key Terms	558	(1)
Questions	558	(1)
Quantitative Problems	559	(1)
Web Exercises: Investment Banks, Brokerage Firms, and Mutual Funds	560	(1)
Insurance Companies and Pension Funds	561	(30)
Preview	561	(1)
Insurance Companies	562	(1)
Fundamentals of Insurance	563	(2)
Adverse Selection and Moral Hazard in Insurance	563	(1)
Selling Insurance	564	(1)
Growth and Organization of Insurance Companies	565	(1)
Types of Insurance	565	(1)
Mini-Case Insurance Agent: The Customer's Ally	565	(2)
Life Insurance	566	(1)
Global The Woes of Lloyd's of London	567	(8)
Health Insurance	571	(1)
Property and Casualty Insurance	572	(2)
Insurance Regulation	574	(1)
Conflicts of Interest Insurance Behemoth Charged with Conflicts of Interest Violations	575	(1)
The Practicing Manager Insurance Management	575	(4)
Pensions	579	(1)
Types of Pensions	579	(3)
Defined-Benefit Pension Plans	579	(1)
Defined-Contribution Pension Plans	580	(1)
Private and Public Pension Plans	581	(1)
Mini-Case Power to the Pensions	582	(3)
Regulation of Pension Plans	585	(2)
Employee Retirement Income Security Act	585	(2)
Individual Retirement Plans	587	(1)
The Future of Pension Funds	587	(1)
Summary	587	(1)
Key Terms	588	(1)
Questions	588	(1)
Quantitative Problems	588	(1)
Web Exercises: Insurance Companies and Pension Funds	589	(2)
Investment Banks, Security Brokers and Dealers, and Venture Capital Firms	591	(24)
Preview	591	(1)
Investment Banks	592	(5)
Background	592	(1)
Underwriting Stocks and Bonds	593	(4)
The Wall Street Journal: Following the News New Securities Issues	597	(3)
Equity Sales	598	(1)
Mergers and Acquisitions	599	(1)
Securities Brokers and Dealers	600	(3)
Brokerage Services	600	(3)
Mini-Case Example of Using the Limit-Order Book	603	(1)
Securities Dealers	604	(1)
Regulation of Securities Firms	604	(1)
Relationship Between Securities Firms and Commercial Banks	605	(1)
Venture Capital Firms	606	(5)
Description of Industry	606	(1)
Venture Capitalists Reduce Asymmetric Information	607	(1)
Origins of Venture Capital	608	(1)
Structure of Venture Capital Firms	609	(1)
The Life of a Deal	609	(2)
E-Finance Venture Capitalists Lose Focus with Internet Companies	611	(1)
Summary	611	(1)
Key Terms	611	(1)
Questions	612	(1)
Quantitative Problems	612	(1)
Web Exercises: Investment Banks, Security Brokers and Dealers, and Venture Capital Firms	613	(2)
PART SEVEN THE MANAGEMENT OF FINANCIAL INSTITUTIONS	615
Risk Management in Financial Institutions	617	(22)
Preview	617	(1)
Managing Credit Risk	617	(5)
Screening and Monitoring	618	(1)
Long-Term Customer Relationships	619	(1)
Loan Commitments	620	(1)
Collateral	620	(1)
Compensating Balances	620	(1)
Credit Rationing	621	(1)
Managing Interest-Rate Risk	622	(10)
Income Gap Analysis	623	(2)
Duration Gap Analysis	625	(4)
Example of a Nonbanking Financial Institution	629	(2)
Some Problems with Income and Duration Gap Analysis	631	(1)
The Practicing Manager Strategies for Managing Interest-Rate Risk	632	(2)
Summary	634	(1)
Key Terms	634	(1)
Questions	634	(1)
Quantitative Problems	634	(3)
Web Exercises: Risk Management in Financial Institutions	637	(2)
Hedging with Financial Derivatives	639
Preview	639	(1)
Hedging	639	(1)
Forward Markets	640	(1)
Interest-Rate Forward Contracts	640	(1)
The Practicing Manager Hedging Interest-Rate Risk with Forward Contracts	640	(2)
Pros and Cons of Forward Contracts	641	(1)
Financial Futures Markets	642	(1)
Financial Futures Contracts	642	(1)
The Wall Street Journal: Following the News Financial Futures	643	(1)
The Practicing Manager Hedging with Financial Futures	644	(5)
Organization of Trading in Financial Futures Markets	646	(1)
Globalization of Financial Futures Markets	646	(2)
Explaining the Success of Futures Markets	648	(1)
Mini-Case The Hunt Brothers and the Silver Crash	649	(1)
The Practicing Manager Hedging Foreign Exchange Risk with Forward and Futures Contracts	650	(2)
Stock Index Futures	652	(1)
Stock Index Futures Contracts	652	(1)
Mini-Case Program Trading and Portfolio Insurance: Were They to Blame for the Stock Market Crash of 1987?	653	(1)
The Wall Street Journal: Following The News Stock Index Futures	654	(1)
The Practicing Manager Hedging with Stock Index Futures	654	(1)
Options	655	(1)
The Wall Street Journal: Following The News Futures Options	656	(6)
Options Contracts	657	(1)
Profits and Losses on Option and Futures Contracts	657	(3)
Factors Affecting the Prices of Option Premiums	660	(1)
Summary	661	(1)
The Practicing Manager Hedging with Futures Options	662	(1)
Interest-Rate Swaps	663	(1)
Interest-Rate Swap Contracts	663	(1)
The Practicing Manager Hedging with Interest-Rate Swaps	664	(3)
Advantages of Interest-Rate Swaps	665	(1)
Disadvantages of Interest-Rate Swaps	666	(1)
Financial Intermediaries in Interest-Rate Swaps	666	(1)
Case Are Financial Derivatives a Worldwide Time Bomb?	667	(1)
Conflicts of Interest The Orange County Bankruptcy	668	(1)
Summary	669	(1)
Key Terms	670	(1)
Questions	670	(1)
Quantitative Problems	670	(2)
Web Exercises: Hedging with Financial Derivatives	672
Appendix: More on Hedging with Financial Derivatives	55
Finance Companies	1	(1)
Glossary	1	(1)
Index	1