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Financial Markets And Institutions

by
Edition:
7th
ISBN13:

9780324288452

ISBN10:
032428845X
Format:
Hardcover
Pub. Date:
1/26/2005
Publisher(s):
Cengage Learning
List Price: $232.80
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Summary

This text describes financial markets and institutions by providing a conceptual framework to understand why markets exist and what their role is in the financial environment. Each type of financial market is described with a focus on its utilization by financial institutions, its internationalization, and recent events that have affected it. Each type of financial institution is described with a focus on its regulatory aspects, management, use of financial markets, and performance. This edition continues its strong tradition of emphasizing timely examples and practical applications, including Internet materials, and offers a unique tie into Internet resources.

Table of Contents

Preface xxi
Part I Overview of the Financial Environment 1(78)
CHAPTER 1 Role of Financial Markets and Institutions
2(23)
Overview of Financial Markets
2(2)
Types of Financial Markets
3(1)
Securities Traded in Financial Markets
4(3)
Money Market Securities
4(1)
Capital Market Securities
5(1)
Derivative Securities
5(2)
Valuation of Securities in Financial Markets
7(1)
Market Pricing of Securities
7(1)
Market Efficiency
8(1)
Impact of Asymmetric Information
9(1)
Financial Market Regulation
9(2)
Disclosure
9(1)
Regulatory Response to Financial Scandals
10(1)
Other Regulations
10(1)
Global Financial Markets
11(2)
How Financial Markets Influence Economic Development
11(1)
Global Integration
11(1)
Role of the Foreign Exchange Market
12(1)
Role of Financial Institutions in Financial Markets
13(4)
Role of Depository Institutions
13(1)
Role of Nondepository Financial Institutions
14(2)
Comparison of Roles among Financial Institutions
16(1)
Overview of Financial Institutions
17(4)
Competition between Financial Institutions
18(1)
Consolidation of Financial Institutions
18(3)
Global Expansion by Financial Institutions
21(1)
Summary
21(1)
Point Counter-Point: Will Computer Technology Cause Financial Intermediaries to Become Extinct?
22(1)
Questions and Applications
22(2)
Advanced Questions
23(1)
Interpreting Financial News
23(1)
Internet Exercise
23(1)
Managing in Financial Markets
23(1)
Flow of Funds Exercise: Roles of Financial Markets and Institutions
24(1)
WSJ Exercise: Differentiating between Primary and Secondary Markets
24(1)
CHAPTER 2 Determination of Interest Rates
25(20)
Loanable Funds Theory
25(7)
Household Demand for Loanable Funds
25(1)
Business Demand for Loanable Funds
26(1)
Government Demand for Loanable Funds
27(1)
Foreign Demand for Loanable Funds
28(1)
Aggregate Demand for Loanable Funds
28(2)
Supply of Loanable Funds
30(1)
Equilibrium Interest Rate
31(1)
Economic Forces That Affect Interest Rates
32(6)
Impact of Economic Growth on Interest Rates
32(2)
Impact of Inflation on Interest Rates
34(1)
Impact of the Money Supply on Interest Rates
35(1)
Impact of the Budget Deficit on Interest Rates
36(1)
Impact of Foreign Flows of Funds on Interest Rates
36(2)
Summary of Forces That Affect Interest Rates
38(1)
Forecasting Interest Rates
38(3)
Summary
41(1)
Point Counter-Point: Does a Large Fiscal Budget Deficit Result in Higher Interest Rates?
41(1)
Questions and Applications
42(1)
Advanced Questions
42(1)
Interpreting Financial News
43(1)
Internet Exercise
43(1)
Managing in Financial Markets
43(1)
Problems
43(1)
Flow of Funds Exercise: How the Flow of Funds Affects Interest Rates
43(1)
WSJ Exercise: Forecasting Interest Rates
44(1)
CHAPTER 3 Structure of Interest Rates
45(34)
Characteristics of Debt Securities That Cause Their Yields to Vary
45(2)
Credit (Default) Risk
45(2)
Using the WSJ: Yields across Securities
47(4)
Liquidity
47(1)
Tax Status
48(1)
Term to Maturity
49(2)
Special Provisions
51(1)
Explaining Actual Yield Differentials
51(2)
Yield Differentials of Money Market Securities
51(1)
Yield Differentials of Capital Market Securities
52(1)
Estimating the Appropriate Yield
53(2)
Using the WSJ: Yield Curve
55(1)
A Closer Look at the Term Structure
55(15)
Pure Expectations Theory
55(6)
Liquidity Premium Theory
61(1)
Segmented Markets Theory
62(2)
Research on Term Structure Theories
64(1)
Integrating the Theories of the Term Structure
65(1)
Uses of the Term Structure
66(1)
Impact of Debt Management on Term Structure
67(2)
Historical Review of the Term Structure
69(1)
International Structure of Interest Rates
70(1)
Summary
71(1)
Point Counter-Point: Should a Yield Curve Influence a Borrower's Preferred Maturity of a Loan?
72(1)
Questions and Applications
72(2)
Advanced Questions
73(1)
Interpreting Financial News
73(1)
Internet Exercise
73(1)
Managing in Financial Markets
73(1)
Problems
74(1)
Flow of Funds Exercise: Influence of the Structure of Interest Rates
75(1)
WSJ Exercise: Interpreting the Structure of Interest Rates
76(3)
Part II The Fed and Monetary Policy 79(50)
CHAPTER 4 Functions of the Fed
80(20)
Organization of the Fed
80(4)
Federal Reserve District Banks
81(1)
Member Banks
81(1)
Board of Governors
81(2)
Federal Open Market Committee (FOMC)
83(1)
Advisory Committees
83(1)
Integration of Federal Reserve Components
84(1)
Monetary Policy Tools
84(8)
Open Market Operations
84(5)
Adjusting the Discount Rate
89(1)
Adjusting the Reserve Requirement Ratio
90(1)
Comparison of Monetary Policy Tools
91(1)
Impact of Technical Factors on Funds
92(1)
Fed Control of the Money Supply
92(2)
Limitations of Controlling Money Supply
93(1)
Monetary Control Act of 1980
94(1)
Global Monetary Policy
95(2)
A Single Eurozone Monetary Policy
95(1)
Global Central Bank Coordination
96(1)
Summary
97(1)
Point Counter-Point: Should There Be One Global Central Bank?
98(1)
Questions and Applications
98(1)
Interpreting Financial News
98(1)
Internet Exercise
98(1)
Managing in Financial Markets
98(1)
Flow of Funds Exercise: Monitoring the Fed
99(1)
WSJ Exercise: Reviewing Fed Policies
99(1)
CHAPTER 5 Monetary Theory and Policy
100(29)
Monetary Theory
100(6)
Pure Keynesian Theory
100(4)
Quantity Theory and the Monetarist Approach
104(1)
Theory of Rational Expectations
105(1)
Which Theory Is Correct?
106(1)
Tradeoff Faced by the Fed
106(4)
Impact of Other Forces on the Tradeoff
107(3)
Economic Indicators Monitored by the Fed
110(3)
Indicators of Economic Growth
111(1)
Indicators of Inflation
111(1)
How the Fed Uses Indicators
112(1)
Index of Leading Economic Indicators
112(1)
Lags in Monetary Policy
113(1)
Assessing the Impact of Monetary Policy
114(4)
Forecasting Money Supply Movements
114(2)
Forecasting the Impact of Monetary Policy
116(2)
Integrating Monetary and Fiscal Policies
118(3)
History
118(1)
Monetizing the Debt
119(1)
Market Assessment of Integrated Policies
120(1)
Global Effects of Monetary Policy
121(2)
Impact of the Dollar
121(1)
Impact of Global Economic Conditions
121(1)
Transmission of Interest Rates
122(1)
Fed Policy during the Asian Crisis
122(1)
Summary
123(1)
Point Counter-Point: Can the Fed Prevent U.S. Recessions?
123(1)
Questions and Applications
124(1)
Advanced Questions
124(1)
Interpreting Financial News
125(1)
Internet Exercise
125(1)
Managing in Financial Markets
125(1)
Flow of Funds Exercise: Anticipating Fed Actions
125(1)
WSJ Exercise: Market Assessment of Fed Policy
125(1)
Part II Integrative Problem and Watching
126(3)
Part III Debt Security Markets 129(122)
CHAPTER 6 Money Markets
130(27)
Money Market Securities
130(13)
Treasury Bills
131(3)
Commercial Paper
134(5)
Negotiable Certificates of Deposit (NCDs)
139(1)
Repurchase Agreements
140(1)
Federal Funds
140(1)
Banker's Acceptances
141(2)
Institutional Use of Money Markets
143(1)
Valuation of Money Market Securities
144(3)
Explaining Money Market Price Movements
145(1)
Efficiency of Money Market Securities
146(1)
Indicators of Future Money Market Security Prices
146(1)
Risk of Money Market Securities
147(1)
Measuring Risk
147(1)
Interaction among Money Market Yields
148(1)
Globalization of Money Markets
148(2)
Using the WSJ: Money Market Rates
150(3)
Eurodollar Deposits and Euronotes
150(2)
Euro-Commercial Paper
152(1)
Performance of Foreign Money Market Securities
152(1)
Summary
153(1)
Point Counter-Point: Should Firms Invest in Money Market Securities?
154(1)
Questions and Applications
154(1)
Advanced Questions
154(1)
Interpreting Financial News
155(1)
Internet Exercise
155(1)
Managing in Financial Markets
155(1)
Problems
155(1)
Flow of Funds Exercise: Financing in the Money Markets
156(1)
WSJ Exercise: Assessing Yield Differentials of Money Market Securities
156(1)
CHAPTER 7 Bond Markets
157(26)
Background on Bonds
157(1)
Bond Yields
157(1)
Treasury and Federal Agency Bonds
158(3)
Treasury Bond Auction
158(1)
Trading Treasury Bonds
159(1)
Treasury Bond Quotations
160(1)
Using the WSJ: Government Bond Price Quotations
161(2)
Stripped Treasury Bonds
162(1)
Inflation-Indexed Treasury Bonds
162(1)
Savings Bonds
163(1)
Federal Agency Bonds
163(1)
Municipal Bonds
163(1)
Credit Risk
163(1)
Using the WSJ: Government Agency & Similar Issues
164(3)
Characteristics of Municipal Bonds
165(1)
Trading and Quotations
166(1)
Yields Offered on Municipal Bonds
166(1)
Corporate Bonds
167(6)
Corporate Bond Yields and Risk
168(1)
Private Placements of Corporate Bonds
169(1)
Characteristics of Corporate Bonds
170(2)
Trading Corporate Bonds
172(1)
Corporate Bond Quotations
172(1)
Using the WSJ: Corporate Bond Price Quotations
173(4)
Junk Bonds
174(2)
How Corporate Bonds Facilitate Restructuring
176(1)
Using the WSJ: Bond Information
177(1)
Institutional Use of Bond Markets
178(1)
Globalization of Bond Markets
178(2)
Eurobond Market
179(1)
Summary
180(1)
Point Counter-Point: Should Financial Institutions Invest in Junk Bonds?
180(1)
Questions and Applications
180(2)
Advanced Questions
181(1)
Interpreting Financial News
181(1)
Internet Exercise
181(1)
Managing in Financial Markets
181(1)
Problems
182(1)
Flow of Funds Exercise: Financing in the Bond Markets
182(1)
WSJ Exercise: Impact of Treasury Financing on Bond Prices
182(1)
CHAPTER 8 Bond Valuation and Risk
183(39)
Bond Valuation Process
183(4)
Bond Valuation with a Present Value Table
184(1)
Impact of the Discount Rate on Bond Valuation
185(1)
Impact of the Timing of Payments on Bond Valuation
185(1)
Valuation of Bonds with Semiannual Payments
186(1)
Use of Annuity Tables for Valuation
186(1)
Relationships between Coupon Rate, Required Return, and Bond Price
187(3)
Implications for Financial Institutions
188(2)
Explaining Bond Price Movements
190(6)
Factors That Affect the Risk-Free Rate
190(2)
Factors That Affect the Credit (Default) Risk Premium
192(3)
Summary of Factors Affecting Bond Prices
195(1)
Bond Market Efficiency
196(1)
Sensitivity of Bond Prices to Interest Rate Movements
196(6)
Bond Price Elasticity
196(2)
Duration
198(4)
Bond Investment Strategies Used by Investors
202(1)
Matching Strategy
202(1)
Laddered Strategy
202(1)
Barbell Strategy
202(1)
Interest Rate Strategy
203(1)
Return and Risk of International Bonds
203(1)
Influence of Foreign Interest Rate Movements
203(1)
Using the WSJ: Total Rates of Return on International Bonds
204(2)
Influence of Credit Risk
204(1)
Influence of Exchange Rate Fluctuations
204(1)
International Bond Diversification
205(1)
Summary
206(1)
Point Counter-Point: Does Governance of Firms Affect the Prices of Their Bonds?
206(1)
Questions and Applications
206(3)
Advanced Questions
207(1)
Interpreting Financial Nevus
208(1)
Internet Exercise
208(1)
Managing in Financial Markets
208(1)
Problems
209(2)
Flow of Funds Exercise: Interest Rate Expectations, Economic Growth, and Bond Financing
211(1)
CNN Video Questions
211(1)
WSJ Exercise: Comparing Bond Price Sensitivity among Bonds
211(1)
APPENDIX 8 Forecasting Bond Prices and Yields
212(10)
CHAPTER 9 Mortgage Markets
222(29)
Background on Mortgages
222(2)
Types of Mortgages
222(2)
Residential Mortgage Characteristics
224(4)
Insured versus Conventional Mortgages
224(1)
Fixed-Rate versus Adjustable-Rate Mortgages
224(2)
Mortgage Maturities
226(2)
Creative Mortgage Financing
228(1)
Graduated-Payment Mortgage (GPM)
228(1)
Growing-Equity Mortgage
228(1)
Second Mortgage
228(1)
Shared-Appreciation Mortgage
228(1)
Institutional Use of Mortgage Markets
229(3)
Financial Institutions That Originate Mortgages
229(1)
Participation in the Secondary Market
229(1)
Institutional Investors in Mortgages
230(1)
Unbundling of Mortgage Activities
231(1)
Valuation of Mortgages
232(1)
Using the WSJ: Mortgage Market Information
232(5)
Factors That Affect the Risk-Free Interest Rate
233(2)
Factors That Affect the Risk Premium
235(1)
Summary of Factors Affecting Mortgage Prices
235(1)
Indicators of Changes in Mortgage Prices
236(1)
Risk from Investing in Mortgages
237(4)
Interest Rate Risk
237(1)
Prepayment Risk
237(1)
Credit Risk
238(1)
Measuring Risk
239(2)
Mortgage-Backed Securities
241(3)
Mortgage Pass-Through Securities
241(1)
Types of Mortgage Pass-Through Securities
242(2)
Mortgage-Backed Securities for Small Investors
244(1)
Globalization of Mortgage Markets
244(1)
Summary
245(1)
Point Counter-Point: Is the Trading of Mortgages Similar to the Trading of Corporate Bonds?
245(1)
Questions and Applications
245(2)
Advanced Questions
246(1)
Interpreting Financial News
246(1)
Internet Exercise
246(1)
Managing in Financial Markets
246(1)
Problem
247(1)
Flow of Funds Exercise: Mortgage Financing
247(1)
WSJ Exercise: Explaining Mortgage Rate Premiums
247(1)
Part III Integrative Problem asset Allocation
248(3)
Part IV Equity Markets 251(110)
CHAPTER 10 Stock Offerings and Investor Monitoring
252(38)
Background on Stock
252(2)
Ownership and Voting Rights
252(1)
Preferred Stock
253(1)
Issuer Participation in Stock Markets
253(1)
Initial Public Offerings
254(6)
Process of Going Public
254(1)
Underwriter Efforts to Ensure Price Stability
255(2)
Timing of IPOs
257(1)
Initial Returns of IPOs
257(1)
Google's IPO
258(2)
Using the WSJ: IPO Scorecard
260(2)
Abuses in the IPO Market
260(1)
Long-Term Performance Following IPOs
261(1)
Secondary Stock Offerings
262(1)
Shelf-Registration
263(1)
Stock Exchanges
263(4)
Organized Exchanges
263(2)
Over-the-Counter Market
265(1)
Extended Trading Sessions
266(1)
Using the WSJ: After-Hours Trading
267(3)
Stock Quotations Provided by Exchanges
268(1)
Stock Index Quotations
269(1)
Using the WSJ: Stock Information
270(1)
Using the WSJ: Stock Market Conditions
271(1)
Investor Participation in the Secondary Market
272(4)
How Investor Decisions Affect the Stock Price
273(1)
Types of Investors
274(2)
Monitoring by Investors
276(3)
Accounting Irregularities
276(1)
Sarbanes-Oxley Act
276(1)
Shareholder Activism
277(2)
The Corporate Monitoring Role
279(3)
Stock Repurchases
279(1)
Market for Corporate Control
280(1)
Barriers to Corporate Control
281(1)
Globalization of Stock Markets
282(2)
Foreign Stock Offerings in the United States
282(1)
International Placement Process
282(1)
Global Stock Exchanges
283(1)
Using the WSJ: Biggest Movers
284(1)
Emerging Stock Markets
284(1)
Methods Used to Invest in Foreign Stocks
284(1)
Summary
285(1)
Point Counter-Point: Should a Stock Exchange
Enforce Some Governance Standards on the Firms Listed on the Exchange?
286(1)
Questions and Applications
286(1)
Advanced Questions
287(1)
Interpreting Financial News
287(1)
Internet Exercise
287(1)
Managing in Financial Markets
287(1)
Problem
287(1)
Flow of Funds Exercise: Contemplating an Initial Public Offering (IPO)
288(1)
CNN Video Questions
288(1)
WSJ Exercise: Assessing Stock Market Movements
289(1)
CHAPTER 11 Stock Valuation and Risk
290(45)
Stock Valuation Methods
290(4)
Price-Earnings (PE) Method
290(1)
Dividend Discount Model
291(2)
Adjusting the Dividend Discount Model
293(1)
Determining the Required Rate of Return to Value Stocks
294(2)
Capital Asset Pricing Model
294(2)
Arbitrage Pricing Model
296(1)
Factors That Affect Stock Prices
296(5)
Economic Factors
297(1)
Market-Related Factors
298(1)
Firm-Specific Factors
299(1)
Integration of Factors Affecting Stock Prices
300(1)
Role of Analysts in Valuing Stocks
301(2)
Conflicts of Interest
302(1)
Impact of Disclosure Regulations
302(1)
Unbiased Analyst Rating Services
302(1)
Stock Risk
303(4)
Measures of Risk
303(4)
Applying Value at Risk
307(2)
Methods of Determining the Maximum Expected Loss
307(1)
Deriving the Maximum Dollar Loss
308(1)
Common Adjustments to the Value-at-Risk Applications
308(1)
Forecasting Stock Price Volatility and Beta
309(2)
Methods of Forecasting Stock Price Volatility
309(1)
Forecasting a Stock Portfolio's Volatility
310(1)
Forecasting a Stock Portfolio's Beta
310(1)
Stock Performance Measurement
311(1)
Sharpe Index
311(1)
Treynor Index
312(1)
Stock Market Efficiency
312(1)
Forms of Efficiency
312(1)
Using the WSJ: Insider Trading Spotlight
313(2)
Tests of the Efficient Market Hypothesis
314(1)
Foreign Stock Valuation, Performance, and Efficiency
315(2)
Valuation of Foreign Stocks
315(1)
Measuring Performance from Investing in Foreign Stocks
316(1)
Performance from Global Diversification
316(1)
Using the WSJ: Global Stock Market Quotations
317(2)
International Market Efficiency
319(1)
Summary
319(1)
Point Counter-Point: Should the Market Rely on Analysts' Opinions?
320(1)
Questions and Applications
320(2)
Advanced Questions
321(1)
Interpreting Financial News
321(1)
Internet Exercise
321(1)
Managing in Financial Markets
321(1)
Problems
322(1)
Flow of Funds Exercise: Valuing Stocks
323(1)
CNN Video Questions
324(1)
WSJ Exercise: Reviewing Abrupt Shifts in Stock Valuation
324(1)
APPENDIX 11 The Link between Accounting and Stock Valuation
325(10)
CHAPTER 12 Market Microstructure and Strategies
335(26)
Stock Market Transactions
335(7)
Placing an Order
335(2)
Margin Trading
337(2)
Short Selling
339(1)
Investing in Stock Indexes
340(2)
Using the WSJ: Exchange Traded Portfolios
342(1)
How Trades Are Executed
343(7)
Floor Brokers
343(1)
Specialists
343(3)
Effect of the Spread on Transaction Costs
346(1)
Electronic Communication Networks (ECNs)
347(2)
Program Trading
349(1)
Regulation of Stock Trading
350(4)
Circuit Breakers
351(1)
Trading Halts
351(1)
Securities and Exchange Commission (SEC)
352(2)
How Barriers to International Stock Trading Have Decreased
354(2)
Reduction in Transaction Costs
354(1)
Reduction in Information Costs
355(1)
Reduction in Exchange Rate Risk
355(1)
Summary
356(1)
Point Counter-Point: Is a Specialist or a Market-Maker Needed?
356(1)
Questions and Applications
356(2)
Advanced Questions
357(1)
Interpreting Financial News
357(1)
Internet Exercise
357(1)
Managing in Financial Markets
357(1)
Problems
358(1)
Flow of Funds Exercise: Shorting Stocks
358(1)
CNN Video Questions
358(1)
Part IV Integrative Problem Stock Market
359(2)
Part V Derivative Security Markets 361(144)
CHAPTER 13 Financial Futures Markets
362(31)
Background on Financial Futures
362(2)
Purpose of Trading Financial Futures
362(1)
Steps Involved in Trading Futures
363(1)
Interpreting Financial Futures Tables
364(2)
Valuation of Financial Futures
366(1)
Impact of the Opportunity Cost
366(1)
Explaining Price Movements of Bond Futures Contracts
366(2)
Speculating with Interest Rate Futures
368(1)
Impact of Leverage
369(1)
Closing Out the Futures Position
369(1)
Hedging with Interest Rate Futures
370(3)
Using Interest Rate Futures to Create a Short Hedge
370(3)
Using Interest Rate Futures to Create a Long Hedge
373(1)
Hedging Net Exposure
373(1)
Bond Index Futures
373(1)
Using the WSJ: Interest Rate Futures Quotations
374(1)
Stock Index Futures
375(5)
Valuing Stock Index Futures Contracts
376(1)
Speculating with Stock Index Futures
377(1)
Hedging with Stock Index Futures
378(1)
Dynamic Asset Allocation with Stock Index Futures
379(1)
Using the WSJ: Stock Index Futures Quotations
380(2)
Prices of Stock Index Futures versus Stocks
380(1)
Arbitrage with Stock Index Futures
381(1)
Circuit Breakers on Stock Index Futures
381(1)
Single Stock Futures
382(1)
Risk of Trading Futures Contracts
383(2)
Market Risk
384(1)
Basis Risk
384(1)
Liquidity Risk
384(1)
Credit Risk
384(1)
Prepayment Risk
385(1)
Operational Risk
385(1)
Regulation in the Futures Markets
385(1)
Institutional Use of Futures Markets
386(1)
Globalization of Futures Markets
387(1)
Non-U.S. Participation in US. Futures Contracts
387(1)
Foreign Stock Index Futures
387(1)
Currency Futures Contracts
388(1)
Summary
388(1)
Point Counter-Point: Has the Futures Market Created More Uncertainty for Stocks?
389(1)
Questions and Applications
389(2)
Advanced Questions
390(1)
Interpreting Financial News
390(1)
Internet Exercise
390(1)
Managing in Financial Markets
390(1)
Problems
391(1)
Flow of Funds Exercise: Hedging with Futures Contracts
391(1)
WSJ Exercise: Assessing Changes in Futures Prices
392(1)
CHAPTER 14 Options Markets
393(44)
Background on Options
393(3)
Markets Used to Trade Options
394(1)
How Option Trades Are Executed
395(1)
Types of Orders
395(1)
Stock Option Quotations
396(1)
Speculating with Stock Options
396(5)
Speculating with Call Options
397(3)
Speculating with Put Options
400(1)
Using the WSJ: Most Active Listed Options
401(1)
Excessive Risk from Speculation
401(1)
Determinants of Stock Option Premiums
402(2)
Determinants of Call Option Premiums
403(1)
Using the WSJ: Long-Term Option Quotations
404(2)
Determinants of Put Option Premiums
405(1)
Explaining Changes in Option Premiums
406(1)
Indicators Monitored by Participants in the Options Market
406(1)
Hedging with Stock Options
407(3)
Hedging with Call Options
407(1)
Hedging with Put Options
408(2)
Using Options to Measure a Stock's Risk
410(1)
Options on ETFs and Stock Indexes
410(2)
Hedging with Stock Index Options
411(1)
Using the WSJ: Stock Index Option Quotations
412(2)
Dynamic Asset Allocation with Stock Index Options
412(1)
Using Index Options to Measure the Market's Risk
413(1)
Options on Futures Contracts
414(2)
Speculating with Options on Futures
415(1)
Using the WSJ: Options on Futures Quotations
416(1)
Hedging with Options on Futures
417(3)
Hedging with Options on Interest Rate Futures
417(1)
Hedging with Options on Stock Index Futures
418(2)
Institutional Use of Options Markets
420(1)
Options as Compensation
420(1)
Globalization of Options Markets
421(1)
Currency Options Contracts
422(1)
Summary
422(1)
Point Counter-Point: If You Were a Major Shareholder of a Publicly Traded Firm, Would You Prefer That Stock Options Be Traded on That Stock?
423(1)
Questions and Applications
423(2)
Advanced Questions
424(1)
Interpreting Financial News
424(1)
Internet Exercise
424(1)
Managing in Financial Markets
424(1)
Problems
425(2)
Flow of Funds Exercise: Hedging with Options Contracts
427(1)
WSJ Exercise: Assessing Stock Option Information
427(1)
APPENDIX 14 Option Valuation
428(9)
CHAPTER 15 Interest Rate Derivative Markets
437(24)
Background
437(2)
Participation by Financial Institutions
439(1)
Types of Interest Rate Swaps
440(8)
Plain Vanilla Swaps
440(2)
Forward Swaps
442(1)
Callable Swaps
443(1)
Putable Swaps
443(1)
Extendable Swaps
444(1)
Zero-Coupon-for-Floating Swaps
445(1)
Rate-Capped Swaps
445(1)
Equity Swaps
446(1)
Other Types of Swaps
446(2)
Risks of Interest Rate Swaps
448(1)
Basis Risk
448(1)
Credit Risk
448(1)
Sovereign Risk
449(1)
Pricing Interest Rate Swaps
449(1)
Prevailing Market Interest Rates
449(1)
Availability of Counterparties
450(1)
Credit and Sovereign Risk
450(1)
Factors Affecting the Performance of Interest Rate Swaps
450(1)
Indicators Monitored by Participants in the Swaps Market
450(1)
Interest Rate Caps, Floors, and Collars
451(3)
Interest Rate Caps
451(1)
Interest Rate Floors
452(1)
Interest Rate Collars
453(1)
Globalization of Swap Markets
454(3)
Currency Swaps
455(1)
Risk of Currency Swaps
456(1)
Summary
457(1)
Point Counter-Point: Should Financial Institutions Engage in Interest Rate Swaps for Speculative Purposes?
458(1)
Questions and Applications
458(1)
Advanced Questions
459(1)
Interpreting Financial News
459(1)
Internet Exercise
459(1)
Managing in Financial Markets
459(1)
Problems
459(1)
Flow of Funds Exercise: Hedging with Interest Rate Derivatives
460(1)
WSJ Exercise: Impact of Interest Rates on Swap Arrangement
460(1)
CHAPTER 16 Foreign Exchange Derivative Markets
461(44)
Background on Foreign Exchange Markets
461(2)
Institutional Use of Foreign Exchange Markets
461(1)
Exchange Rate Quotations
462(1)
Using the WSJ: Foreign Exchange Rate Quotations
463(2)
Types of Exchange Rate Systems
464(1)
Factors Affecting Exchange Rates
465(3)
Differential Inflation Rates
465(1)
Differential Interest Rates
466(1)
Central Bank Intervention
466(1)
Indirect Intervention
467(1)
Foreign Exchange Controls
468(1)
Movements in Exchange Rates
468(1)
Forecasting Exchange Rates
469(2)
Technical Forecasting
470(1)
Fundamental Forecasting
470(1)
Market-Based Forecasting
470(1)
Mixed Forecasting
471(1)
Forecasting Exchange Rate Volatility
471(2)
Speculation in Foreign Exchange Markets
473(1)
Foreign Exchange Derivatives
473(2)
Forward Contracts
474(1)
Using the WSJ: Currency Futures Quotations
475(2)
Currency Futures Contracts
475(1)
Currency Swaps
476(1)
Currency Options Contracts
476(1)
Using the WSJ: Foreign Exchange Derivatives
477(3)
Use of Foreign Exchange Derivatives for Speculating
478(2)
International Arbitrage
480(2)
Locational Arbitrage
480(1)
Covered Interest Arbitrage
481(1)
Explaining Price Movements of Foreign Exchange Derivatives
482(2)
Indicators of Foreign Exchange Derivative Prices
483(1)
Summary
484(1)
Point Counter-Point: Do Financial Institutions Need to Consider Foreign Exchange Market Conditions when Making Domestic Security Market Decisions?
485(1)
Questions and Applications
485(1)
Interpreting Financial News
485(1)
Internet Exercise
486(1)
Managing in Financial Markets
486(1)
Problems
486(1)
Flow of Funds Exercise: Hedging with Foreign Exchange Derivatives
487(1)
CNN Video Questions
487(1)
WSJ Exercise: Assessing Exchange Rate Movements
488(1)
APPENDIX 16A Impact of the Asian Crisis on Foreign Exchange Markets and Other Financial Markets
489(10)
APPENDIX 16B Currency Option Pricing
499(4)
Part V Integrative Problem choosing among Derivative Securities
503(2)
Part VI Commercial Banking 505(110)
CHAPTER 17 Commercial Bank Operations
506(25)
Commercial Banks as Financial Intermediaries
506(1)
Bank Market Structure
506(3)
Bank Participation in Financial Conglomerates
507(1)
Impact of the Financial Services Modernization Act
508(1)
Bank Sources of Funds
509(6)
Transaction Deposits
509(1)
Savings Deposits
510(1)
Time Deposits
510(1)
Money Market Deposit Accounts
511(1)
Federal Funds Purchased
512(1)
Borrowing from the Federal Reserve Banks
512(1)
Repurchase Agreements
513(1)
Eurodollar Borrowings
513(1)
Bonds Issued by the Bank
513(1)
Bank Capital
514(1)
Summary of Bank Sources of Funds
514(1)
Uses of Funds by Banks
515(8)
Cash
515(1)
Bank Loans
516(4)
Investment in Securities
520(1)
Federal Funds Sold
521(1)
Repurchase Agreements
521(1)
Eurodollar Loans
522(1)
Fixed Assets
522(1)
Summary of Bank Uses of Funds
522(1)
Off-Balance Sheet Activities
523(2)
Loan Commitments
524(1)
Standby Letters of Credit
524(1)
Forward Contracts
524(1)
Swap Contracts
524(1)
International Banking
525(1)
Global Competition in Foreign Countries
525(1)
Expansion by Non-U.S. Banks in the United States
525(1)
Impact of the Euro on Global Competition
526(1)
Summary
526(1)
Point Counter-Point: Should Banks Engage in Other Financial Services Besides Banking?
527(1)
Questions and Applications
527(1)
Interpreting Financial News
527(1)
Internet Exercise
527(1)
Managing in Financial Markets
528(1)
Flow of Funds Exercise: Services Provided by Financial Conglomerates
528(1)
APPENDIX 17 Electronic Funds Transfer
529(2)
CHAPTER 18 Bank Regulation
531(26)
Background
531(1)
Regulatory Structure
532(1)
Regulatory Overlap
532(1)
Regulation of Bank Ownership
533(1)
Deregulation Act of 1980
533(1)
Gam-St Germain Act
534(1)
Regulation of Deposit Insurance
534(1)
Regulation of Capital
535(4)
Basel Accord
535(1)
Basel II Accord
536(2)
Use of the Value-at-Risk Method to Determine Capital Requirements
538(1)
Regulation of Operations
539(3)
Regulation of Loans
539(1)
Regulation of Investment in Securities
539(1)
Regulation of Securities Services
539(2)
Regulation of Insurance Services
541(1)
Regulation of Off-Balance Sheet Transactions
542(1)
Regulation of the Accounting Process
542(1)
Regulation of Interstate Expansion
542(2)
Interstate Banking Act
543(1)
How Regulators Monitor Banks
544(5)
Capital Adequacy
544(1)
Asset Quality
544(1)
Management
545(1)
Earnings
545(1)
Liquidity
545(1)
Sensitivity
546(1)
Rating Banh Characteristics
546(1)
Corrective Action by Regulators
547(1)
Funding the Closure of Failing Banks
547(2)
The "Too-Big-to-Fail" Issue
549(3)
Argument for Government Rescue
550(1)
Argument against Government Rescue
551(1)
Proposals for Government Rescue
551(1)
Global Bank Regulations
552(2)
Uniform Global Regulations
552(2)
Summary
554(1)
Point Counter-Point: Should Regulators Intervene to Take Over Weak Banks?
554(1)
Questions and Applications
554(2)
Interpreting Financial News
555(1)
Internet Exercise
555(1)
Managing in Financial Markets
555(1)
Flow of Funds Exercise: Impact of Regulation and Deregulation on Financial Services
556(1)
WSJ Exercise: Impact of Bank Regulations
556(1)
CHAPTER 19 Bank Management
557(36)
Bank Management
557(1)
Board of Directors
557(1)
Managing Liquidity
558(1)
Use of Securitization to Boost Liquidity
558(1)
Managing Interest Rate Risk
559(10)
Methods Used to Assess Interest Rate Risk
560(4)
Determining Whether to Hedge Interest Rate Risk
564(1)
Methods Used to Reduce Interest Rate Risk
564(4)
International Interest Rate Risk
568(1)
Managing Credit Risk
569(6)
Tradeoff between Credit Risk and Expected Return
569(2)
Measuring Credit Risk
571(1)
Diversifying Credit Risk
571(4)
Managing Market Risk
575(1)
Measuring Market Risk
575(1)
Methods Used to Reduce Market Risk
576(1)
Operating Risk
576(1)
Managing Risk of International Operations
577(1)
Exchange Rate Risk
577(1)
Settlement Risk
577(1)
Bank Capital Management
578(1)
Management Based on Forecasts
579(1)
Bank Restructuring
580(1)
Bank Acquisitions
581(1)
Integrated Bank Management
581(4)
Example
582(3)
Summary
585(1)
Point Counter-Point: Can Bank Failures Be Avoided?
585(1)
Questions and Applications
585(2)
Advanced Questions
586(1)
Interpreting Financial News
586(1)
Internet Exercise
586(1)
Managing in Financial Markets
587(1)
Problems
587(1)
Flow of Funds Exercise: Managing Credit Risk
588(2)
WSJ Exercise: Bank Management Strategies
590(1)
APPENDIX 19 Stock Price Reaction to Bank Policies
591(2)
CHAPTER 20 Bank Performance
593(22)
Valuation of a Commercial Bank
593(4)
Factors That Affect Cash Flows
594(1)
Factors That Affect the Required Rate of Return by Investors
595(1)
Impact of the September 11 Crisis on Commercial Bank Values
596(1)
Performance Evaluation of Banks
597(7)
Interest Income and Expenses
597(2)
Noninterest Income and Expenses
599(2)
Net Income
601(3)
Risk Evaluation of Banks
604(1)
How to Evaluate a Bank's Performance
605(3)
Examination of Return on Assets (ROA)
605(1)
Example
606(2)
Bank Failures
608(1)
Reasons for Bank Failure
608(1)
Summary
609(1)
Point Counter-Point: Does a Bank's Income Statement Clearly Indicate the Bank's Performance?
610(1)
Questions and Applications
610(1)
Interpreting Financial News
610(1)
Internet Exercise
610(1)
Managing in Financial Markets
611(1)
Problem
611(1)
Flow of Funds Exercise: How the Flow of Funds Affects Bank Performance
611(1)
WSJ Exercise: Assessing Bank Performance
611(1)
Part VI Integrative Problem Forecasting Bank Performance
612(3)
Part VII Nonbank Operations 615(125)
CHAPTER 21 Thrift Operations
616(27)
Background on Savings Institutions
616(3)
Ownership
617(1)
Regulation of Savings Institutions
618(1)
Sources and Uses of Funds
619(3)
Sources of Funds
620(1)
Uses of Funds
621(1)
Exposure to Risk
622(4)
Liquidity Risk
623(1)
Credit Risk
623(1)
Interest Rate Risk
624(2)
Management of Interest Rate Risk
626(1)
Adjustable-Rate Mortgages (ARMs)
626(1)
Interest Rate Futures Contracts
626(1)
Interest Rate Swaps
627(1)
Conclusions about Interest Rate Risk
627(1)
Valuation of a Savings Institution
627(3)
Factors That Affect Cash Flows
627(1)
Factors That Affect the Required Rate of Return by Investors
628(2)
Interaction with Other Financial Institutions
630(1)
Participation in Financial Markets
630(1)
Performance of Savings Institutions
631(1)
Performance of Savings Institutions versus Commercial Banks
632(1)
Savings Institution Crisis
632(3)
Reasons for Failure
632(1)
Provisions of the FIRREA
633(1)
Creation of the RTC
634(1)
Impact of the Bailout
634(1)
Performance since the FIRREA
634(1)
Background on Credit Unions
635(2)
Ownership of Credit Unions
636(1)
Advantages and Disadvantages of Credit Unions
636(1)
Sources and Uses of Credit Union Funds
637(1)
Sources of Funds
637(1)
Uses of Funds
637(1)
Credit Union Exposure to Risk
637(1)
Liquidity Risk
638(1)
Credit Risk
638(1)
Interest Rate Risk
638(1)
Regulation of Credit Unions
638(1)
Regulation of State-Chartered Credit Unions
639(1)
Insurance for Credit Unions
639(1)
Summary
639(1)
Point Counter-Point: Can All Savings Institutions Avoid Failure?
640(1)
Questions and Applications
640(2)
Interpreting Financial News
641(1)
Internet Exercise
641(1)
Managing in Financial Markets
641(1)
Flow of Funds Exercise: Market Participation by Savings Institutions
642(1)
WSJ Exercise: Assessing Performance of Savings Institutions
642(1)
CHAPTER 22 Consumer Finance Operations
643(12)
Types of Finance Companies
643(1)
Sources of Finance Company Funds
644(1)
Loans from Banks
644(1)
Commercial Paper
644(1)
Deposits
644(1)
Bonds
644(1)
Capital
645(1)
Uses of Finance Company Funds
645(1)
Consumer Loans
645(1)
Business Loans and Leasing
646(1)
Real Estate Loans
646(1)
Regulation of Finance Companies
646(1)
Risks Faced by Finance Companies
647(1)
Liquidity Risk
647(1)
Interest Rate Risk
647(1)
Credit Risk
647(1)
Captive Finance Subsidiaries
647(1)
Advantages of Captive Finance Subsidiaries
648(1)
Valuation of a Finance Company
648(2)
Factors That Affect Cash Flows
649(1)
Factors That Affect the Required Rate of Returnby Investors
649(1)
Interaction with Other Financial Institutions
650(1)
Participation in Financial Markets
651(1)
Multinational Finance Companies
652(1)
Summary
652(1)
Point Counter-Point: Will Finance Companies Be Replaced by Banks?
652(1)
Questions and Applications
652(1)
Interpreting Financial News
653(1)
Internet Exercise
653(1)
Managing in Financial Markets
653(1)
Flow of Funds Exercise: How Finance Companies Facilitate the Flow of Funds
653(1)
WSJ Exercise: Finance Company Performance
654(1)
CHAPTER 23 Mutual Fund Operations
655(34)
Background on Mutual Funds
655(2)
Types of Funds
656(1)
Using the WSJ: Closed-End Fund Quotations
657(6)
Comparison to Depository Institutions
658(1)
Regulation and Taxation
658(1)
Information Contained in a Prospectus
659(1)
Estimating the Net Asset Value
659(1)
Distributions to Shareholders
659(1)
Mutual Fund Classifications
660(1)
Expenses Incurred by Shareholders
660(2)
Sales Load
662(1)
12b-1 Fees
663(1)
Corporate Control by Mutual Funds
663(1)
Stock Mutual Fund Categories
663(2)
Growth Funds
664(1)
Capital Appreciation Funds
664(1)
Growth and Income Funds
664(1)
International and Global Funds
664(1)
Using the WSJ: Mutual Fund Prices and Performance
665(1)
Specialty Funds
665(1)
Index Funds
666(1)
Multifund Funds
666(1)
Bond Mutual Fund Categories
666(2)
Income Funds
666(1)
Tax-Free Funds
667(1)
High-Yield (Junk) Bond Funds
667(1)
International and Global Bond Funds
667(1)
Maturity Classifications
667(1)
Asset Allocation Funds
668(1)
Growth and Size of Mutual Funds
668(2)
Performance of Mutual Funds
670(4)
Performance of Stock Mutual Funds
670(1)
Performance of Closed-End Stock Funds
671(1)
Performance of Bond Mutual Funds
672(1)
Performance of Closed-End Bond Funds
673(1)
Performance from Diversifying among Mutual Funds
673(1)
Research on Stock Mutual Fund Performance
673(1)
Research on Bond Mutual Fund Performance
674(1)
Mutual Fund Scandals
674(1)
Governance of Mutual Funds
675(1)
Money Market Funds
675(5)
Asset Composition of Money Market Funds
676(1)
Maturity of Money Market Funds
676(1)
Risk of Money Market Funds
676(3)
Management of Money Market Funds
679(1)
Regulation and Taxation of Money Market Funds
679(1)
Using the WSJ: Money Market Fund Quotations
680(1)
Hedge Funds
680(2)
Hedge Fund Fees
681(1)
Regulation
681(1)
Financial Problems Experienced by Long-Term Capital Management
681(1)
Real Estate Investment Trusts
682(1)
Interaction with Other Financial Institutions
683(1)
Use of Financial Markets
684(1)
Globalization through Mutual Funds
684(1)
Summary
685(1)
Point Counter-Point: Should Mutual Funds Be Subject to More Regulation?
685(1)
Questions and Applications
685(2)
Interpreting Financial News
686(1)
Internet Exercise
686(1)
Managing in Financial Markets
686(1)
Flow of Funds Exercise: How Mutual Funds Facilitate the Flow of Funds
687(1)
CNN Video Questions
687(1)
WSJ Exercise: Performance of Mutual Funds
688(1)
CHAPTER 24 Securities Operations
689(23)
Investment Banking Services
689(7)
How IBFs Facilitate New Stock Offerings
689(2)
How IBFs Facilitate New Bond Offerings
691(2)
How IBFs Facilitate Leveraged Buyouts
693(1)
How IBFs Facilitate Arbitrage
693(1)
How IBFs Facilitate Corporate Restructuring
694(2)
Brokerage Services
696(2)
Market Orders
696(1)
Limit Orders
696(1)
Short Selling
696(1)
Full-Service versus Discount Brokerage Services
697(1)
Online Orders
697(1)
Sources of Income
698(1)
Income Allocation among Securities Firms
698(1)
Regulation of Securities Firms
699(3)
Financial Services Modernization Act
700(1)
Regulation FD
700(1)
Rules Regarding Analyst Compensation and Ratings
701(1)
Rules Preventing Abuses in the IPO Market
701(1)
Repeal of the Trade-Through Rule
702(1)
Mutual Fund Disclosure
702(1)
Risks of Securities Firms
702(1)
Market Risk
702(1)
Interest Rate Risk
703(1)
Credit Risk
703(1)
Exchange Rate Risk
703(1)
Valuation of a Securities Firm
703(2)
Factors That Affect Cash Flows
704(1)
Factors That Affect the Required Rate of Return by Investors
704(1)
Interaction with Other Financial Institutions
705(1)
Participation in Financial Markets
706(2)
Competition between Securities Firms and Commercial Banks
707(1)
Globalization of Securities Firms
708(1)
Growth in International Joint Ventures
708(1)
Growth in International Securities Transactions
708(1)
Summary
709(1)
Point Counter-Point: Should Analysts Be Separated from Investment Banks to Prevent Conflicts of Interest?
709(1)
Questions and Applications
710(1)
Interpreting Financial News
710(1)
Internet Exercise
710(1)
Managing in Financial Markets
710(1)
Flow of Funds Exercise: How Investment Banking Facilitates the Flow of Funds
711(1)
WSJ Exercise: Performance of Securities Firms
711(1)
CHAPTER 25 Insurance and Pension Fund Operations
712(28)
Background
712(1)
Determinants of Insurance Premiums
713(1)
Investments by Insurance Companies
713(1)
Life Insurance Operations
713(5)
Ownership
714(1)
Types of Life Insurance
714(1)
Sources of Funds
715(1)
Uses of Funds
716(1)
Asset Management of Life Insurance Companies
717(1)
Property and Casualty Insurance Operations
718(2)
Cash Flow Underwriting
718(1)
Uses of Funds
719(1)
Property and Casualty Reinsurance
719(1)
Health Care Insurance Operations
720(1)
Types of Health Care Plans
720(1)
Managed Health Care Plans
720(1)
Health Care Insurance in the Future
720(1)
Business Insurance
721(1)
Regulation of Insurance Companies
721(1)
Assessment System
722(1)
Regulation of Capital
722(1)
Exposure to Risk
722(1)
Interest Rate Risk
722(1)
Credit Risk
723(1)
Market Risk
723(1)
Liquidity Risk
723(1)
Valuation of an Insurance Company
723(3)
Factors That Affect Cash Flows
724(1)
Factors That Affect the Required Rate of Return by Investors
725(1)
Performance Evaluation
726(1)
Interaction with Other Financial Institutions
726(2)
Participation in Financial Markets
728(1)
Multinational Insurance Companies
728(1)
Background on Pension Funds
729(1)
Public Pension Funds
729(1)
Private Pension Plans
729(1)
Underfunded Pensions
730(1)
Pension Regulations
730(1)
The Pension Benefit Guaranty Corporation
731(1)
Pension Fund Management
731(2)
Management of Insured versus Trust Portfolios
732(1)
Management of Portfolio Risk
733(1)
Corporate Control by Pension Funds
733(1)
Performance of Pension Funds
733(2)
Determinants of a Pension Fund's Stock Portfolio Performance
734(1)
Determinants of a Pension Fund's Bond Portfolio Performance
734(1)
Performance Evaluation
735(1)
Performance of Pension Portfolio Managers
735(1)
Pension Fund Participation in Financial Markets
735(2)
Summary
737(1)
Point Counter-Point: Should Defined-Contribution Pension Funds Be Actively Managed?
737(1)
Questions and Applications
737(2)
Interpreting Financial News
738(1)
Internet Exercise
738(1)
Managing in Financial Markets
738(1)
Flow of Funds Exercise: How Insurance Companies Facilitate the Flow of Funds
739(1)
WSJ Exercise: Insurance Company Performance
739(1)
Part VII Integrative Problem Assessing the Influence of Economic Conditions across a Financial Conglomerate's Units 740(1)
Appendix A: Comprehensive Project 741(11)
Appendix B: Using Excel for Statistical Analysis 752(3)
Glossary 755(7)
Index 762


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