Part I The Financial System 1 Chapter 1 An Overview of Financial Markets and Institutions 3 Chapter Preview 4 Learning Objectives 4 1.1 The Financial System 4 1.2 Financial Markets and Direct Financing 7 Do You Understand? 10 People & Events: A Brief Examination of the Causes and Effects of the Global Financial Crisis of 2007 and 2008 11 1.3 Types of Financial Markets 12 1.4 The Money Markets 14 1.5 The Capital Markets 15 Do You Understand? 17 1.6 Financial Intermediaries and Indirect Financing 17 Do You Understand? 22 1.7 Types of Financial Intermediaries 23 Do You Understand? 27 1.
8 The Risks Financial Institutions Manage 28 1.9 Regulation of the Financial System 29 People & Events: Systemically Risky Banks: What is the Solution? 33 1.10 Ethics and the Financial System 33 Do You Understand? 35 Summary of Learning Objectives 35 Key Terms 36 Questions and Problems 36 Chapter 2 The Federal Reserve and Its Powers 38 Chapter Preview 39 Learning Objectives 39 2.1 Origins of the Federal Reserve System 39 People & Events: Banking before 1933, Banking from 1933 to 1980, and Banking in the Modern Era 43 2.2 The Current Structure of the Fed 44 2.3 Monetary Powers of the Board of Governors 47 2.4 The Fed''s Regulatory Powers 47 2.5 Independence of the Fed 51 Do You Understand? 53 2.
6 The Fed''s Balance Sheet 53 2.7 The Fed''s Role in Check Clearing and the Growth of Electronic Payments 59 Learning by Doing 2.1: Computing a Bank''s Excess Reserve Position 60 2.8 Federal Reserve Tools of Monetary Policy 61 People & Events: The Challenges of Fed Chair Janet Yellen 62 Learning by Doing 2.2: Calculating a Bank''s Reserve Position 66 Summary of Learning Objectives 69 Key Terms 69 Questions and Problems 69 Chapter 3 The Fed and Interest Rates 71 Chapter Preview 72 Learning Objectives 72 3.1 Federal Reserve Control of the Money Supply 72 3.2 The Fed''s Influence on Interest Rates 75 3.3 The Treasury Department and Fiscal Policy 79 Do You Understand? 81 3.
4 Goals of Monetary Policy 82 People & Events: The Fed as Lender of Last Resort During the Financial Crisis 87 3.5 The Fed and the Economy 88 People & Events: Black Monday 91 3.6 Complications of Monetary Policy 91 3.7 Anatomy of a Financial Crisis 93 People & Events: Good Work If You Can Get It: Executive Bonuses During Bailouts? 100 Do You Understand? 101 Summary of Learning Objectives 102 Key Terms 102 Questions and Problems 102 Part II How Interest Rates are Determined 105 Chapter 4 The Level of Interest Rates 107 Chapter Preview 108 Learning Objectives 108 4.1 What are Interest Rates? 108 4.2 The Real Rate of Interest 109 4.3 Loanable Funds Theory of Interest 111 Do You Understand? 114 4.4 Price Expectations and Interest Rates 114 4.
5 A Restatement of the Fisher Equation 116 People & Events: What Is the Actual Inflation Rate? 117 Do You Understand? 121 People & Events: Estimating the Expected Rate of Inflation from TIPS 122 4.6 Forecasting Interest Rates 122 4.7 Interest Rates and Currency Values 124 Summary of Learning Objectives 125 Key Terms 126 Questions and Problems 126 Chapter 5 Bond Prices and Interest Rate Risk 127 Chapter Preview 128 Learning Objectives 128 5.1 The Time Value of Money 128 Do You Understand? 130 5.2 Bond Pricing 131 People & Events: Bond Market Liquidity and the Volcker Rule 132 Learning by Doing 5.1: Calculating the Price of a Bond Using a Financial Calculator 135 5.3 Bond Yields 136 Learning by Doing 5.2: Calculating the YieldtoMaturity on a Bond 137 Do You Understand? 140 5.
4 Important Bond Pricing Relationships 140 5.5 Interest Rate Risk and Duration 144 Learning by Doing 5.3: Calculating the Duration of a Bond 146 People & Events: Betting the Farm on Interest Rates and Losing 155 Do You Understand? 156 Summary of Learning Objectives 156 Key Terms 157 Questions and Problems 157 Chapter 6 The Structure of Interest Rates 159 Chapter Preview 160 Learning Objectives 160 6.1 The Term Structure of Interest Rates 160 Learning by Doing 6.1: Using the Term Structure Formula to Calculate Implied Forward Rates 165 Do You Understand? 171 People & Events: More on Forecasting Future Interest Rates 172 6.2 Default Risk 172 6.3 Tax Treatment 176 People & Events: The CreditRating Club 177 Do You Understand? 180 6.4 Marketability 180 6.
5 Options on Debt Securities 180 6.6 Behavior of Interest Rates over the Business Cycle 183 Do You Understand? 185 Summary of Learning Objectives 185 Key Terms 186 Questions and Problems 186 Part III Financial Markets 189 Chapter 7 Money Markets 191 Chapter Preview 192 Learning Objectives 192 7.1 How the Money Markets Work 192 7.2 Economic Role of the Money Markets 193 7.3 Features of Money Market Instruments 194 7.4 Treasury Bills 194 Learning by Doing 7.1: Calculating the Discount Yield 199 Learning by Doing 7.2: Calculating the Bond Equivalent Yield 199 Do You Understand? 200 7.
5 Federal Agency Securities 201 7.6 Federal Funds 203 7.7 Other Major Money Market Instruments 205 People & Events: Lehman Brothers'' "Creative" Accounting: Repos 105 and 108 207 7.8 Money Market Participants 211 7.9 The Impact of the 2007-2008 Financial Crisis on the Money Markets 213 People & Events: How Breaking the Buck (Almost) Broke the Commercial Paper Market 216 Do You Understand? 217 Summary of Learning Objectives 218 Key Terms 219 Questions and Problems 219 Chapter 8 Bond Markets 220 Chapter Preview 221 Learning Objectives 221 8.1 Functions of the Capital Markets 221 8.2 The U.S.
Government and Agency Securities 223 People & Events: What Do Negative Yields on TIPS Tell Us? 226 Do You Understand? 227 8.3 State and Local Government Bonds 227 People & Events: Build America Bonds Keep Municipal Finance Going During the Crisis 232 8.4 Corporate Bonds 232 Do You Understand? 237 8.5 Financial Guarantees 237 8.6 Securitized Credit Instruments 238 8.7 Capital Market Regulators 240 8.8 Bond Markets Around the World are Increasingly Linked 241 8.9 The Impact of the 2007-2008 Financial Crisis on the Bond Markets 242 Do You Understand? 244 Summary of Learning Objectives 244 Key Terms 245 Questions and Problems 245 Chapter 9 Mortgage Markets and MortgageBacked Securities 247 Chapter Preview 248 Learning Objectives 248 9.
1 The Unique Nature of Mortgage Markets 249 9.2 Types of Mortgages 249 9.3 Mortgage Qualifying 257 Learning by Doing 9.1: Determining How Much Home You Can Buy 259 Do You Understand? 260 9.4 MortgageBacked Securities 261 9.5 Mortgage Prepayment Risk and Other MBS 265 Do You Understand? 270 9.6 Participants in the Mortgage Markets 271 People & Events: The Rise and Fall of Fannie and Freddie 273 Do You Understand? 274 9.7 Relationship Between Mortgage Markets and the Capital Markets 275 Summary of Learning Objectives 276 Key Terms 277 Questions and Problems 278 Chapter 10 Equity Markets 279 Chapter Preview 280 Learning Objectives 280 10.
1 What are Equity Securities? 280 10.2 Equity Markets 282 People & Events: The Retail Brokerage Industry 287 10.3 Equity Trading 287 10.4 Global Stock Markets 291 10.5 Large-Scale and High Frequency Trading 292 People & Events: High Speed Trading and the Demise of Knight Capital Group in 45 Minutes 293 10.6 Regulation of Equity Markets 294 Do You Understand? 294 10.7 Stock Market Indexes 295 People & Events: Circuit Breakers, Black Monday, and the Flash Crash 296 Summary of Learning Objectives 297 Key Terms 298 Questions and Problems 299 Chapter 11 Derivatives Markets 300 Chapter Preview 301 Learning Objectives 301 11.1 The Nature of Derivative Securities 301 11.
2 Forward Markets 302 11.3 Futures Markets 304 Do You Understand? 311 11.4 Uses of the Financial Futures Markets 311 Learning by Doing 11.1: Hedging Risk in a Stock Portfolio 313 11.5 Risks in the Futures Markets 318 Do You Understand? 319 11.6 Options Markets 319 Do You Understand? 325 11.7 Swap Markets 326 People & Events: Swap Market Regulation 329 Summary of Learning Objectives 330 Key Terms 331 Questions and Problems 331 Chapter 12 International Markets 332 Chapter Preview 333 Learning Objectives 333 12.1 The Difficulties of International Trade 333 12.
2 Exchange Rates 334 12.3 Balance of Payments 337 12.4 Foreign Exchange Markets 341 12.5 Spot and Forward Transactions 343 Learning by Doing 12.1: Using Forward Contracts to Hedge Exchange Rate Risks 343 People & Events: The Big Mac Test of Purchasin.