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Principles of Money, Banking, and Financial Markets

by ; ;
Edition:
12th
ISBN13:

9780201770353

ISBN10:
0201770350
Format:
Hardcover
Pub. Date:
1/1/2009
Publisher(s):
Prentice Hall
List Price: $180.00
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Table of Contents

Preface xxv
Acknowledgments xxx
About the Authors xxxiii
PART I The Basics
1(50)
Introducing Money, Banking, and Financial Markets
3(10)
An Overview
4(1)
Why Study Money, Banking, and Financial Markets?
5(1)
Careers in Banking and Financial Markets
5(6)
An Overview
6(1)
Specific Opportunities
7(1)
Trading
8(1)
Sales
9(1)
Financial Economist
9(1)
Fixed-Income Research
10(1)
Loan Officer
10(1)
Bank Examiner
11(1)
Key Terms
11(1)
Media Resource List
12(1)
The Role of Money in the Macroeconomy
13(20)
Introducing Money
14(1)
Going Out on a Limb: The Launch of the Euro
14(7)
Who Determines Our Money Supply?
16(2)
The Importance of Money I: Money Versus Barter
18(1)
The Importance of Money II: Financial Institutions and Markets
19(2)
Money, the Economy, and Inflation
21(8)
Bank Reserves and the Money Supply
21(2)
How Large Should the Money Supply Be?
23(2)
Velocity: The Missing Link
25(1)
Money and Inflation
26(2)
Disappear?
28(1)
Summary
29(1)
Key Terms
30(1)
Questions
30(1)
Media Resource List
31(2)
Financial Instruments, Markets, and Institutions
33(18)
Flow of Funds
33(2)
Financial Instruments and Markets
35(8)
Bonds Represent Borrowing
36(1)
Stocks Represent Ownership
37(1)
Mortgages Involve Real Estate
38(1)
Derivatives: Options and Futures
39(1)
The Money and Capital Markets: A Summary
40(3)
Financial Intermediaries: Purposes and Profile
43(5)
The Role of Financial Intermediaries
43(2)
Financial Intermediaries in Profile
45(3)
Summary
48(1)
Key Terms
49(1)
Questions
50(1)
Media Resource List
50(1)
PART II Financial Instruments and Markets
51(144)
Interest Rate Measurement and Behavior
53(24)
Calculating Interest Rates
53(5)
Simple Interest
53(1)
Compound Interest
54(2)
Coupon Rate on Bonds
56(1)
Current Yield
56(1)
Yield to Maturity
56(2)
Off the Record: The Million Dollar Lottery: A Case of Misleading Advertising?
58(2)
Zero-Coupon Bonds
59(1)
Reading the Financial News: Government Bond Market Quotations
60(5)
The Inverse Relationship Between Yields and Bond Prices
61(1)
Why Long-Term Bonds Are Riskier than Shorts
62(1)
Nominal Versus Real Interest Rates
63(1)
Return Versus Yield to Maturity
64(1)
What Determines the Level of Interest Rates?
65(6)
Supply and Demand Determine the Interest Rate
65(3)
Why Does the Interest Rate Fluctuate?
68(2)
Behind Supply and Demand
70(1)
The Importance of Inflationary Expectations
71(1)
In the News: Greenspan Worries That Budget Deficits Will Raise Interest Rates
71(3)
Cyclical and Long-Term Trends in Interest Rates
72(2)
Summary
74(1)
Key Terms
75(1)
Questions
75(1)
Media Resource List
76(1)
The Risk and Term Structure of Interest Rates
77(18)
The Term Structure of Rates and the Yield Curve
77(7)
Supply and Demand
78(1)
The Pure Expectations Approach
79(1)
The Liquidity Premium Modification
80(1)
The Preferred Habitat Approach
81(1)
Real-World Observations
81(3)
Going Out on a Limb: Is the Shape of the Yield Curve a Crystal Ball?
84(1)
An Aside on Marketability
85(1)
Risk and Tax Structure of Rates
85(3)
Summary
88(1)
Key Terms
89(1)
Questions
89(1)
Media Resource List
90(1)
Appendix: Bond Price Volatility: Duration Versus Maturity
91(3)
Key Terms
94(1)
The Structure and Performance of Securities Markets
95(16)
Nature and Function of Securities Markets
95(5)
Auction Market
96(1)
Brokered Market
96(1)
Dealer Market
96(1)
Primary Versus Secondary Markets
97(3)
Efficiency of Secondary Market Trading
100(4)
In the News: After-Hours Trading Exposes Investors to Volatile Prices and Wider Spreads
104(1)
Going Out on a Limb: The Computer Will Prevail
105(1)
Efficient Capital Markets and Regulation
106(1)
In the News: Electronic Trading Networks Look Toward the Big Board
106(2)
Summary
108(1)
Key Terms
108(1)
Questions
109(1)
Media Resource List
109(2)
The Pricing of Risky Financial Assets
111(12)
A World of Certainty
113(1)
Consequences of Uncertainty and Risk Aversion
113(3)
An Aside on Measuring Risk
115(1)
Principles of Diversification
116(2)
In the News: Former Workers at Lucent See Nest Eggs Vanish Too
118(1)
The Risk Premium on Risky Securities
119(1)
Going Out on a Limb: Buy an Index Fund
120(1)
Summary
121(1)
Key Terms
121(1)
Questions
121(1)
Media Resource List
122(1)
Money and Capital Markets
123(30)
The Government Bond Market
123(8)
Types of Securities and Investors
124(2)
How the Market Works
126(1)
Treasury Bills: Auctions and Yields
126(3)
Repurchase Agreements
129(2)
Bank-Related Securities: CDs and Eurodollars
131(1)
Corporate Securities
132(2)
Corporate Bonds
132(2)
Going Out on a Limb: Junk Is Good
134(1)
Reading the Financial News: Corporate Bond Market Quotations
135(1)
Commercial Paper
135(1)
Municipal Securities
136(3)
In the News: General Obligation Bonds Might Yield More than Revenue Bonds
139(1)
Mortgage Securities
139(1)
The Stock Market
140(2)
Structure of the Stock Market
141(1)
Reading the Financial News: Stock Market Quotations
142(2)
What Determines Whether Stock Prices Rise or Fall?
142(2)
Off the Record: The Dow Jones Versus the S&P 500
144(2)
Money and Stock Prices
145(1)
Going Out on a Limb: Dow 36,000 Versus Irrational Exuberance
146(3)
Summary
149(1)
Key Terms
150(1)
Questions
150(1)
Media Resource List
151(2)
Demystifying Derivatives
153(22)
An Overview of Financial Futures
153(1)
In the News: Congress Again Tries to Tighten Derivatives a Bit
154(4)
Using Financial Futures Contracts
157(1)
Reading the Financial News: Financial Futures Quotations
158(2)
Pricing Financial Futures Contracts
159(1)
An Overview of Options Contracts
160(3)
Using and Valuing Options
162(1)
Reading the Financial News: Options Quotations
163(4)
What Determines Options Premiums?
165(2)
Going Out on a Limb: Don't Blame Derivatives
167(1)
An Overview of Swaps
168(3)
Why Swap?
169(1)
Valuing a Swap
170(1)
Summary
171(1)
Key Terms
172(1)
Questions
173(1)
Media Resource List
173(2)
Understanding Foreign Exchange
175(20)
What Determines Foreign Exchange Rates?
175(1)
Reading the Financial News: Foreign Exchange Quotations
176(8)
Why Do Exchange Rates Fluctuate?
179(5)
In the News: Dollar's Neighbors Feeling Uneasy
184(4)
How Global Investors Cause Exchange Rate Volatility
184(4)
Fixed Versus Floating Exchange Rates
188(1)
How Fixed Rates Are Supposed to Work
188(1)
In the News: Argentina Unlinks Peso from Dollar, Bracing for Devaluation and Even Harder Times
189(3)
International Financial Crises
191(1)
Summary
192(1)
Key Terms
193(1)
Questions
193(1)
Media Resource List
194(1)
PART III Banks and Other Intermediaries
195(68)
The Nature of Financial Intermediation
197(22)
The Economics of Financial Intermediation
197(5)
The Evolution of Financial Intermediaries in the United States
202(10)
The Shifting Sands of Interest Rates
204(1)
The Regulation Q Security Blanket
204(1)
The Birth of the Money Market Mutual Fund
204(1)
The Savings and Loan Crisis
205(3)
The Rise of Commercial Paper
208(1)
The Institutionalization of Financial Markets
209(1)
The Transformation of Traditional Banking
210(2)
Financial Intermediaries: Assets, Liabilities, and Management
212(1)
In the News: Congress Passes Wide-Ranging Bill Easing Bank Laws
213(3)
Summary
216(1)
Key Terms
217(1)
Questions
218(1)
Media Resource List
218(1)
Depository Financial Institutions
219(28)
The Fundamentals of Bank Management
219(11)
Uses of Bank Funds
220(2)
Sources of Bank Funds
222(3)
Bank Profitability
225(2)
Bank Risk
227(1)
Leverage Risk
228(1)
Credit Risk
228(1)
Interest Rate Risk
229(1)
In the News: Viewpoints: Mid-Tier Banks Are Especially Vulnerable to Rate Changes
230(2)
Trading Risk
231(1)
Liquidity Risk
231(1)
Major Trends in Bank Management
232(5)
The Consolidation Within the Banking Industry
232(1)
The McFadden Act
232(1)
The Erosion of McFadden
233(1)
Measuring Consolidation
234(1)
The Economics of Consolidation
234(2)
Nontraditional Banking
236(1)
In the News: Big Banks Signal They May Be Gearing Up for Acquisitions
237(6)
Globalization
239(1)
American Banks Abroad
239(1)
Foreign Banks in the United States
240(1)
The Euromarkets
240(3)
Nonbank Depository Institutions---The Thrifts
243(1)
Summary
244(1)
Key Terms
244(1)
Questions
245(1)
Media Resource List
246(1)
Nondepository Financial Institutions
247(16)
Life Insurance Companies
247(2)
Pension Funds
249(2)
Property and Casualty Insurance Companies
251(1)
In the News: Many Companies Fight Shortfalls in Pension Funds
252(1)
Mutual Funds
253(1)
Finance Companies
254(1)
Securities Brokers and Dealers and Investment Banks
255(1)
In the News: Investment Banks and Tainted Stock Research: Should Investors Have Known Better?
256(1)
Venture Capital Funds, Mezzanine Debt Funds, and Hedge Funds
257(1)
Banks Versus Nondepository Institutions
258(1)
Summary
259(1)
Key Terms
260(1)
Questions
260(1)
Media Resource List
261(2)
PART IV Financial System Architecture
263(72)
Understanding Financial Contracts
265(26)
How Business Obtains Financing
266(11)
Financing Small Businesses
266(6)
Financing Midsize Businesses
272(2)
Financing Large Businesses
274(3)
The Economics of Financial Contracting
277(2)
In the News: A Journey into the Secret Heart of Capitalism Turns into a Roller Coaster Ride
279(8)
Asymmetric Information and Financial Contracting
279(3)
Contracting and the Firm Continuum
282(3)
Consumer Lending, Financial Contracting, and Securitization
285(2)
Summary
287(1)
Key Terms
288(1)
Questions
288(1)
Media Resource List
289(2)
The Regulation of Markets and Institutions
291(22)
The Regulation of Financial Markets in the United States
292(2)
The Regulation of the Primary Market
293(1)
The Regulation of the Secondary Markets
293(1)
The Regulation of Commercial Banks in the United States
294(1)
Off the Record: Insider Trading: Efficiency Versus Equity
295(11)
The U.S. Banking Regulatory Structure
295(2)
Regulations to Protect Individual Depositors and Financial System Stability
297(1)
Deposit Insurance
298(2)
Moral Hazard and Deposit Insurance
300(1)
Risk-Based Capital Requirements
301(2)
Prompt Corrective Action
303(1)
Risk-Based Deposit Insurance Premiums
304(2)
Regulation of Nondepository Financial Intermediaries
306(1)
Where Securities Market and Banking Regulation Meet: The Glass-Steagall Act, A Collapsing Barrier
307(3)
The Genesis of Glass-Steagall
307(1)
The Erosion of Glass-Steagall
308(1)
The Risk of Universal Banking
309(1)
Summary
310(1)
Key Terms
311(1)
Questions
311(1)
Media Resource List
312(1)
Financial System Design
313(22)
Information and Financial System Design
314(5)
Stockholder-Lender Conflict
314(1)
Manager-Stockholder Conflict
315(1)
Conflict Resolution and Financial System Design
316(1)
Small Firms: Stockholder-Lender Conflict
317(1)
Large Firms: Stockholder-Lender Conflicts
318(1)
Large Firms: Manager-Stockholder Conflict
318(1)
Financial System Design: A Descriptive Summary of Germany, Japan, the United Kingdom, and the United States
319(3)
Germany
320(1)
Japan
321(1)
In the News: German Banking's Industrial Revolution
322(3)
United Kingdom
323(1)
United States
324(1)
Financial System Design and Conflict Resolution: Germany, Japan, the United Kingdom, and the United States
325(4)
Conflict Resolution in the Big Four
326(2)
And the Winner Is . . .
328(1)
Going Out on a Limb: Do Corporate Scandals Mean that the Markets-Oriented Model Is a Bad Example?
329(1)
Financial System Design for Eastern Europe and Other Emerging Economies
330(1)
Summary
331(1)
Key Terms
332(1)
Questions
332(1)
Media Resource List
333(2)
PART V The Art of Central Banking
335(90)
Who's in Charge Here?
337(12)
Formal Structure of the Federal Reserve System
338(3)
The Realities of Power
341(2)
The Problem of Federal Reserve Independence
343(2)
Going Out on a Limb: Central Bank Independence and Inflation: Lessons from History
345(1)
Summary
346(1)
Key Terms
346(1)
Questions
347(1)
Media Resource List
347(2)
Bank Reserves and the Money Supply
349(24)
Check Clearing and Collection
350(2)
Going Out on a Limb: How Does Technology Affect the Payments Process?
352(2)
Deposit Expansion: The Single Bank
354(3)
Deposit Expansion: The Banking System
357(2)
Deposit Contraction
359(2)
Summary
361(1)
Key Terms
361(1)
Questions
362(1)
Media Resource List
362(1)
Appendix: The Complete Money Supply Process
363(1)
Shifts Between Currency and Checking Deposits
364(3)
Shifts Between Time Deposits and Checking Accounts
367(2)
The Role of Interest Rates
369(2)
Key Term
371(2)
The Instruments of Central Banking
373(16)
Reserve Requirements
373(2)
Discounting and the Discount Rate
375(2)
Going Out on a Limb: The Discount Window Helped to Minimize the Impact of September 11, 2001
377(3)
The Discount Rate and Market Interest Rates
379(1)
Open Market Operations
380(2)
Off the Record: Three Key Interest Rates
382(5)
A Day at the Trading Desk
384(3)
Summary
387(1)
Key Terms
388(1)
Questions
388(1)
Media Resource List
388(1)
Understanding Movements in Bank Reserves
389(22)
The Fed's Balance Sheet
390(7)
The U.S. Treasury's Monetary Accounts
397(1)
The Bank Reserve Equation
398(2)
In the News: The Federal Reserve, Bank Reserves, and the Y2K Scare
400(1)
Putting It All to Use
400(2)
Focusing on the Monetary Base
402(1)
Summary
402(1)
Key Terms
403(1)
Questions
403(1)
Media Resource List
403(1)
Appendix: Monetary Effects of Treasury Financing
404(7)
Monetary Policy Strategy
411(14)
The FOMC Directive
412(1)
The Fed's Strategy
413(7)
Reserves Versus the Federal Funds Rate
414(5)
Can the Fed Really Control Reserves?
419(1)
In the News: Deflation, Zero Interest Rates, and the Choice of Targets
420(1)
The Taylor Rule and the Fed's Track Record
421(1)
Summary
422(1)
Key Terms
423(1)
Questions
423(1)
Media Resource List
423(2)
PART VI Monetary Theory
425(156)
The Classical Foundations
427(24)
Say's Law
427(2)
Classical Interest Theory
429(2)
Off the Record: Investment Versus Investment
431(1)
The Quantity Theory of Money
432(3)
The Cambridge Approach
433(2)
Money Demand and the Quantity Theory
435(1)
Aggregate Demand and Supply: A Summary
436(3)
Real Versus Nominal Rates of Interest
439(1)
Modern Modifications: Monetarists and New Classicists
440(1)
Going Out on a Limb: The Money Supply and the Great Depression
441(1)
Summary
442(1)
Key Terms
443(1)
Questions
443(1)
Media Resource List
444(1)
Appendix: GDP Definitions and Relationships
445(1)
The Circular Flow of Spending, Income, and Output
445(1)
Saving and Investment
446(5)
The Keynesian Framework
451(32)
When Saving Doesn't Equal Investment
452(2)
Consumption and Simple GDP Determination
454(2)
Changes in GDP
456(4)
Autonomous Versus Induced Changes in GDP
460(1)
Exports and Imports
461(1)
Government to the Rescue
461(3)
Off the Record: Taking the Pulse of the Economy
464(1)
Money and the Rate of Interest
465(4)
Monetary Policy
469(7)
Monetary Policy and International Trade
472(1)
Transactions Demand and Monetary Policy
473(2)
Expectations and Monetary Policy
475(1)
Aggregate Demand and Supply
476(3)
Summary
479(1)
Key Terms
480(1)
Questions
480(1)
Media Resource List
481(2)
The ISLM World
483(36)
Money, Interest, and Income
483(3)
All About LM
486(3)
Monetary Policy and the LM Curve
487(2)
The Goods Market
489(3)
All About IS
492(3)
The Simultaneous Determination of Income and Interest: IS and LM Together
495(2)
Monetary and Fiscal Policy
497(6)
Monetary Policy
497(3)
Fiscal Policy
500(3)
Keynes and the Classics
503(2)
When Will Full Employment Prevail?
505(2)
Going Out on a Limb: ISLM Analysis Lives
507(3)
ISLM and Aggregate Demand
510(2)
Summary
512(1)
Key Terms
512(1)
Questions
513(1)
Media Resource List
513(1)
Appendix: The Simple Algebra of Income Determination
514(1)
The Model
514(1)
The IS and LM Functions
515(1)
Equilibrium Income and Interest
515(1)
Multiplier Effects on Income and the Interest Rate
515(1)
Policy Implications
516(3)
Money and Economic Stability in the ISLM World
519(16)
Monetary Policy, Fiscal Policy, and Crowding Out
519(6)
Is the Private Sector Inherently Stable?
525(2)
Flexible Prices, the Natural Rate of Interest, and Real Crowding Out
527(2)
Summary
529(1)
Key Term
530(1)
Questions
530(1)
Media Resource List
530(1)
Appendix: Interest Rates Versus the Money Supply Under Uncertainty
531(4)
An Aggregate Supply and Demand Perspective on Money and Economic Stability
535(20)
Is the Private Sector Inherently Stable?
536(4)
Monetary Policy, Fiscal Policy, and Crowding Out
540(2)
Going Out on a Limb: Are Bank Loans Special?
542(1)
Inflation, Money, and the Phillips Curve
543(3)
Inflation and Interest Rates
546(3)
Should a Robot Replace the Federal Reserve?
549(4)
Summary
553(1)
Key Terms
553(1)
Questions
554(1)
Media Resource List
554(1)
Rational Expectations: Theory and Policy Implications
555(12)
When Are Expectations Rational?
556(1)
Anticipated Versus Unanticipated Monetary Policy
556(1)
Off the Record: Applying Rational Expectations to the Securities Markets
557(1)
Implications for Stabilization Policy
558(2)
Inflation, the Phillips Curve, and Credibility
560(3)
Interest Rates and Anticipated Monetary Policy
563(1)
Summary
564(1)
Key Term
564(1)
Questions
564(1)
Media Resource List
565(2)
Empirical Evidence on the Effectiveness of Monetary Policy
567(14)
Living with Velocity
568(2)
The Demand for Money
570(1)
Computer Simulations and Time Lags
571(1)
Going Out on a Limb: Where Is All That Cash Hiding?
572(2)
The Impact of Monetary Policy on GDP
574(1)
Fiscal Policy and Crowding Out
575(1)
The Impact of Money on Interest Rates
575(2)
Business Investment
577(1)
Residential Construction
578(1)
Consumer Spending
578(1)
Summary
579(1)
Key Terms
579(1)
Questions
579(1)
Media Resource List
580(1)
PART VII Grand Finale
581(16)
Tying It All Together
583(14)
The Economic Indicators
583(4)
The Employment Report
586(1)
In the News: Reading the Indicators: Is Employment Rising or Falling?
587(3)
Housing Starts and Building Permits
588(1)
Purchasing Managers' Index (PMI)
589(1)
Index of Leading Economic Indicators
589(1)
Valuation, the Fed, and Market Reaction
590(1)
Good News Versus Bad News: The Role of Expectations
590(1)
Stock and Bond Valuation---A Refresher
591(1)
In the News: Stocks Hold Ground Gained in Big Rally---Treasury Bonds Retreat Again
591(3)
Putting It All Together
594(1)
Summary
595(1)
Key Terms
595(1)
Questions
595(1)
Media Resource List
596(1)
Glossary 597(18)
Index 615


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