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Financial Institutions, Markets, and Money, 10th Edition

by Kidwell, David S., Univ. of Minnesota; Blackwell, David W., Texas A&M University; Whidbee, David A., Washington State Univ.; Peterson, Richard L., Texas Tech Univ.

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Copyright, iv
Preface, v
About the Authors, xii
Part I. THE FINANCIAL SYSTEM, 1
Chapter 1. An Overview of Financial Markets and Institutions, 3
Chapter Preview, 3
Purpose, 4
Learning Objectives, 4
Role of the Financial System, 4
Moving Funds from SSUs to DSUs, 7
Do You Understand?, 11
The Benefits of Financial Intermediation, 11
PEOPLE & EVENTS: Wall Street Faces Global Competition, 12
Do You Understand?, 14
Types of Financial Intermediaries, 15
Do You Understand?, 20
Types of Financial Markets, 20
The Money Markets, 22
The Capital Markets, 23
Financial Market Efficiency, 25
Risks Faced by Financial Institutions, 26
Chapter Take-Aways, 28
Key Terms, 29
Questions and Problems, 29
Internet Exercise, 30
Chapter 2. The Federal Reserve and Its Powers, 31
Chapter Preview, 31
Purpose, 32
Learning Objectives, 32
Origins of The Federal Reserve System, 32
PEOPLE & EVENTS: Wildcat Banks: Red Dogs and Cow Chips, 35
The Current Structure of the Fed, 36
Monetary Powers of the Board of Governors, 39
The Fed’s Regulatory Powers, 41
Independence of the Fed, 43
Do You Understand?, 45
The Fed’s Balance Sheet, 46
The Fed’s Role in Check Clearing, 49
Federal Reserve Tools of Monetary Policy, 50
PEOPLE & EVENTS: Changing the Guard, 51
Chapter Take-Aways, 57
Key Terms, 57
Questions and Problems, 57
Internet Exercise, 58
Chapter 3. The Fed and Interest Rates, 59
Chapter Preview, 59
Purpose, 60
Learning Objectives, 60
Federal Reserve Control of the Money Supply, 60
The Fed’s Control Over Interest Rates, 63
Do You Understand?, 68
Objectives of Monetary Policy, 68
PEOPLE & EVENTS: The Fed as Lender of Last Resort: Preventing a Financial Panic, 74
The Fed and the Economy, 76
PEOPLE & EVENTS: A More Forthcoming Fed, 79
Complications of Monetary Policy, 79
Do You Understand?, 81
Chapter Take-Aways, 81
Key Terms, 82
Questions and Problems, 82
Internet Exercise, 82
Part II. HOW INTEREST RATES ARE DETERMINED, 85
Chapter 4. The Level of Interest Rates, 87
Chapter Preview, 87
Purpose, 88
Learning Objectives, 88
What Are Interest Rates?, 88
The Real Rate of Interest, 89
Loanable Funds Theory of Interest, 90
Do You Understand?, 93
Price Expectationsand Interest Rates, 94
PEOPLE & EVENTS: Irving Fisher (1867–1947): Economist and Social Reformer, 96
Do You Understand?, 99
PEOPLE & EVENTS: Can Interest Rates Be Negative?, 99
Forecasting Interest Rates, 100
Chapter Take-Aways, 102
Key Terms, 102
Questions and Problems, 102
Internet Exercise, 103
Chapter 5. Bond Prices and Interest Rate Risk, 104
Chapter Preview, 104
Purpose, 105
Learning Objectives, 105
The Time Value of Money, 105
Do You Understand?, 107
Bond Pricing, 108
PEOPLE & EVENTS: College Student Wins $100 Million Lottery!, 109
Bond Yields, 112
Do You Understand?, 117
Important Bond Pricing Relationships, 117
Interest Rate Risk and Duration, 121
PEOPLE & EVENTS: Junk Bonds: A Really Bad Month, 129
Do You Understand?, 132
Chapter Take-Aways, 133
Key Terms, 134
Questions and Problems, 134
Internet Exercise, 135
Chapter 6. The Structure of Interest Rates, 136
Chapter Preview, 136
Purpose, 137
Learning Objectives, 137
The Term Structure of Interest Rates, 137
Do You Understand?, 147
Default Risk, 148
PEOPLE & EVENTS: The Credit-Rating Club, 153
Tax Treatment, 154
Do You Understand?, 156
Marketability, 157
Options on Debt Securities, 157
PEOPLE & EVENTS: Hot CoCo Options, 159
Do You Understand?, 160
Chapter Take-Aways, 161
Key Terms, 161
Questions and Problems, 162
Internet Exercise, 163
Part III. FINANCIAL MARKETS, 165
Chapter 7. Money Markets, 167
Chapter Preview, 167
Purpose, 168
Learning Objectives, 168
How the Money Markets Work, 169
Economic Role of the Money Market, 169
Characteristics of Money Market Instruments, 170
Treasury Bills, 171
Do You Understand?, 177
Federal Agency Securities, 178
Federal Funds, 180
Repurchase Agreements, 182
PEOPLE & EVENTS: The Collapse of ESM: Life in the Fast Lane, 183
Commercial Paper, 184
PEOPLE & EVENTS: The Perils of Commercial Paper—Being Kicked Out of the Club, 187
Negotiable Certificates of Deposit, 188
Banker’s Acceptance, 190
Money Market Participants, 193
The Interrelationship of Money Market Interest Rates, 196
Do You Understand?, 197
Chapter Take-Aways, 197
Key Terms, 198
Questions and Problems, 198
Internet Exercise, 199
Chapter 8. Bond Markets, 200
Chapter Preview, 200
Purpose, 201
Learning Objectives, 201
Functions of the Capital Markets, 201
U.S. Government and Agency Securities, 204
Do You Understand?, 208
State and Local Government Bonds, 208
PEOPLE & EVENTS: How Orange County Got It Wrong, 212
Corporate Bonds, 214
Do You Understand?, 220
Financial Guarantees, 220
Securitized Credit Instruments, 221
Financial Market Regulators, 222
PEOPLE & EVENTS: Securitization "Rocks", 223
Bond Markets Around the World are Increasingly Linked, 224
Do You Understand?, 225
Chapter Take-Aways, 225
Key Terms, 226
Questions and Problems, 226
Internet Exercise, 227
Chapter 9. Mortgage Markets, 228
Chapter Preview, 228
Purpose, 229
Learning Objectives, 229
The Unique Nature of Mortgage Markets, 229
Types of Mortgages, 230
PEOPLE & EVENTS: Option Arms: Useful Tool or Ticking Timebomb?, 238
Do You Understand?, 241
Mortgage-Backed Securities, 241
Mortgage Prepayment Risk, 248
Do You Understand?, 250
Participants in the Mortgage Markets, 250
PEOPLE & EVENTS: Predators Fall Prey to Their Own Devices in Subprime Mortgage Markets, 255
Relationship Between Mortgage Markets and the Capital Markets, 256
Chapter Take-Aways, 256
Key Terms, 257
Questions and Problems, 258
Internet Exercise, 258
Chapter 10. Equity Markets, 260
Chapter Preview, 260
Purpose, 261
Learning Objectives, 261
What are Equity Securities?, 261
Equity Markets, 264
Equity Trading, 269
Global Stock Markets, 272
PEOPLE & EVENTS: A Quieter Trading Floor, 273
Regulation of Equity Markets, 274
Do You Understand?, 275
Equity Valuation Basics, 275
Equity Risk, 279
Do You Understand?, 283
Stock Market Indexes, 283
PEOPLE & EVENTS: Chapter 11 Bankruptcies Create Zombie Firms, 284
The Stock Market as a Predictor of Economic Activity, 287
Chapter Take-Aways, 289
Key Terms, 290
Questions and Problems, 290
Internet Exercise, 291
Chapter 11. Derivatives Markets, 292
Chapter Preview, 292
Purpose, 293
Learning Objectives, 293
The Nature of Derivative Securities, 293
Forward Markets, 294
Futures Markets, 295
PEOPLE & EVENTS: Rogue Traders Can Sink Large Institutions, 303
Do You Understand?, 304
Uses of the Financial Futures Markets, 304
PEOPLE & EVENTS: Talking and Trading Politics and Weather, 311
Risks in the Futures Markets, 312
Do You Understand?, 313
Options Markets, 313
Do You Understand?, 319
Regulation of the Futures and Options Markets, 320
Swap Markets, 321
Chapter Take-Aways, 324
Key Terms, 325
Questions and Problems, 325
Internet Exercise, 326
Chapter 12. International Markets, 327
Chapter Preview, 327
Purpose, 328
Learning Objectives, 328
The Difficulties of International Trade, 328
Exchange Rates, 329
Balance of Payments, 333
International Trade and Exchange Rates, 337
PEOPLE & EVENTS: Burgernomics Tests the Purchasing Power Parity Theory, 338
Capital Flows and Exchange Rates, 341
Do You Understand?, 344
Government Intervention in Foreign Exchange Markets, 344
Foreign Exchange Markets, 347
Spot and Forward Transactions, 348
PEOPLE & EVENTS: Prices and Earnings: A Global Comparison, 349
Financing International Trade, 351
Do You Understand?, 354
International Money and Capital Markets, 355
The Internationalization of Financial Markets, 358
Chapter Take-Aways, 360
Key Terms, 361
Questions and Problems, 361
Internet Exercise, 362
Part IV. COMMERCIAL BANKING, 363
Chapter 13. Commercial Bank Operations, 365
Chapter Preview, 365
An Overview of the Banking Industry, 366
Learning Objectives, 366
Purpose, 366
The Source of Bank Funds, 370
Balance Sheet for a Commercial Bank, 370
PEOPLE & EVENTS: Banks Learn from Wal-Mart and Other Retailers, 374
Do You Understand?, 377
Bank Uses of Funds: Bank Investments and Cash Assets, 377
Bank Uses of Funds: Loans and Leases, 380
Loan Pricing, 384
Analysis of Loan Credit Risk, 387
PEOPLE & EVENTS: What’s Your Score?, 388
Do You Understand?, 389
Pricing Bank Deposits, 389
Fee-Based Services, 390
Off-Balance-Sheet Banking, 393
Bank and Financial Holding Companies, 397
Do You Understand?, 398
Chapter Take-Aways, 399
Key Terms, 399
Questions and Problems, 400
Internet Exercise, 400
Chapter 14. Bank Management and Profitability, 402
Chapter Preview, 402
Purpose, 403
Learning Objectives, 403
Bank Earnings, 403
Bank Performance, 408
A Banking Dilemma: Profitability Versus Safety, 408
Liquidity Management, 411
Do You Understand?, 414
Bank Capital Management, 414
PEOPLE & EVENTS: Increased Focus on Operational Risk, 419
Managing Credit Risk, 419
PEOPLE & EVENTS: “Bank of Presidents” Loses More Than a Sock in the Laundry, 421
Do You Understand?, 424
Managing Interest Rate Risk, 424
Hedging Interest Rate Risk, 432
Do You Understand?, 437
Chapter Take-Aways, 438
Key Terms, 438
Questions and Problems, 439
Internet Exercise, 440
Chapter 15. International Banking, 441
Chapter Preview, 441
Purpose, 442
Learning Objectives, 442
Development of International Banking, 442
Regulation of Overseas Banking Activities, 445
Delivery of Overseas Banking Services, 448
PEOPLE & EVENTS: Coming Soon: The Bank of Europe, 452
Do You Understand?, 453
International Lending, 453
PEOPLE & EVENTS: A Banker to the Rescue?, 456
PEOPLE & EVENTS: Swiss Banking: Neutrality and Confidentiality After the Holocaust Banking Scandals, 461
Do You Understand?, 462
Foreign Banks in the United States, 462
Future Directions of International Banking, 466
Chapter Take-Aways, 467
Key Terms, 467
Questions and Problems, 467
Internet Exercise, 468
Chapter 16. Regulation of Financial Institutions, 469
Chapter Preview, 469
Purpose, 470
Learning Objectives, 470
Reasons for Regulation, 471
Bank Failures and Regulation, 473
Safety and Soundness Regulation: Deposit Insurance, 478
Do You Understand?, 482
Deposit Insurance Issues, 482
Do You Understand?, 486
PEOPLE & EVENTS: The Comptroller of the Currency: Then and Now, 487
Bank Examinations, 487
Structure and Competition Regulations, 490
Consumer Protection Regulations, 493
PEOPLE & EVENTS: Dual or Dueling Banking Systems?, 494
Bank Regulators, 496
Do You Understand?, 498
Chapter Take-Aways, 499
Key Terms, 499
Questions and Problems, 500
Internet Exercise, 500
Part V. FINANCIAL INSTITUTIONS, 503
Chapter 17. Thrift Institutions and Finance Companies, 505
Chapter Preview, 505
Purpose, 506
Learning Objectives, 507
Historical Development of Savings Institutions, 507
Operations of Savings Institutions, 511
Do You Understand?, 518
Credit Unions, 519
PEOPLE & EVENTS: Demographic Change Brings Opportunity, 520
PEOPLE & EVENTS: Commercial Banks vs. Credit Unions, 527
Thrift Institutions Around the Globe, 528
Do You Understand?, 528
Finance Companies, 528
Do You Understand?, 536
Chapter Take-Aways, 536
Key Terms, 537
Questions and Problems, 537
Internet Exercise, 538
Chapter 18. Insurance Companies and Pension Funds, 539
Chapter Preview, 539
Purpose, 540
Learning Objectives, 540
Insurance, 540
PEOPLE & EVENTS: Credit History and Personal Lines Underwriting, 542
PEOPLE & EVENTS: 9/11 and Katrina: Insurance Coverage Disputes, 543
The Insurance Industry, 546
Do You Understand?, 553
Life and Health Insurance, 553
Do You Understand?, 559
Property and Liability Insurance, 559
Do You Understand?, 562
Pensions, 562
Do You Understand?, 567
Chapter Take-Aways, 568
Key Terms, 569
Questions and Problems, 569
Internet Exercise, 570
Chapter 19. Investment Banking, 571
Chapter Preview, 571
Purpose, 572
Learning Objectives, 572
The Relationship Between Commercial and Investment Banking, 572
PEOPLE & EVENTS: The Fall of the House that Junk Built, 573
Primary Services of an Investment Bank, 579
PEOPLE & EVENTS: A Loose E-mail Clogs the IPO Money Machine, 584
Do You Understand?, 590
Venture Capital, 590
Do You Understand?, 594
Chapter Take-Aways, 594
Key Terms, 595
Questions and Problems, 595
Internet Exercise, 595
Chapter 20. Investment Companies, 596
Chapter Preview, 596
Purpose, 597
Learning Objectives, 597
Investment Companies, 597
PEOPLE & EVENTS: Batman Saves Gotham City!, 601
Mutual Funds, 606
Do You Understand?, 612
Hedge Funds, 614
PEOPLE & EVENTS: The Demise of Long-Term Capital Management, 616
Do You Understand?, 618
Money Market Mutual Funds, 619
Real Estate Investment Trusts, 622
Do You Understand?, 624
Chapter Take-Aways, 625
Key Terms, 625
Questions and Problems, 625
Internet Exercise, 626
Glossary, 627
Credits and Acknowledgments, 654
Index, 656

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