Principles of Money, Banking, and Financial Markets

by Ritter, Lawrence S.; Silber, William L.; Udell, Gregory F.

• ISBN13: 9780201770353
• ISBN10: 0201770350
• Edition: 12th
• Format: Hardcover
• Copyright: 2009-01-01
• Publisher: Prentice Hall

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