CourseSmart eBook Financial Institutions and Markets

Title
Contents
Part 1 The Global Financial System in Perspective
	1 Functions and Roles of Financial Institutions and Markets in the Global Economy
		1.1 Introduction to the System of Financial Institutions and Markets
		1.2 The Global Economy and the System of Financial Institutions and Markets
		Flows within the Global Economic System
		The Role of Markets in the Global Economic System
		Types of Markets
		The Financial Markets and the Financial System: Channel for Savings and Investment
		Nature of Savings
		Nature of Investment
			1.3 Economic Functions Performed by the Global System of Financial Institutions and Markets
		Savings Function
		Wealth Function
		Liquidity Function
		Credit Function
		Payments Function
		Risk Protection Function
		Policy Function
			1.4 Types of Financial Markets within the Global Financial System
		The Money Market versus the Capital Market
		Divisions of the Money and Capital Markets
		Open versus Negotiated Markets
		Primary versus Secondary Markets
		Spot versus Futures, Forward, and Option Markets
			1.5 Factors Tying All Financial Markets Together
		Credit, the Common Commodity
		Speculation and Arbitrage
			1.6 The Dynamic Financial System
			1.7 The Plan of This Book
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	2 Financial Assets, Money, Financial Transactions, and Financial Institutions
		2.1 Introduction: The Role of Financial Assets
		2.2 The Nature and Characteristics of Financial Assets
		Characteristics of Financial Assets
		Types of Financial Assets
			2.3 How Financial Assets Are Created
			2.4 Financial Assets and the Financial System
			2.5 Lending and Borrowing in the Financial System
			2.6 Money as a Financial Asset
		What Is Money?
		The Functions of Money
		The Value of Money and Other Financial Assets and Inflation
			2.7 The Evolution of Financial Transactions
		Direct Finance
		Semidirect Finance
		Indirect Finance and Financial Intermediation
			2.8 Relative Sizes and Types of Major Financial Institutions
		Comparative Sizes of Key Financial- Service Providers
		Classifying Financial Institutions
		Portfolio (Financial-Asset) Decisions by Financial Institutions
			2.9 The Disintermediation of Funds
		New Types of Disintermediation
			2.10 Bank-Dominated versus Market- Dominated Financial Systems
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	3 Efficient Markets and Financial Information
		3.1 Introduction: The Importance of Information to Financial Institutions and Markets
		3.2 The Great Debate over Efficient Markets and Asymmetric Information
		The Efficient Markets Hypothesis (EMH)
		What Is an Efficient Market?
		Different Forms of the EMH
		Insiders and Insider Trading
		What Is Insider Trading?
		When Is Insider Trading Legal or Illegal?
		The Asymmetric Information Hypothesis (AIH)
		Asymmetries Affect People’s Behavior
		Problems Asymmetries Can Create: Lemons and Plums
		Problems Asymmetries Can Create: Adverse Selection
		Problems Asymmetries Can Create: Moral Hazard
		Asymmetry, Efficiency, and Real- World Markets
		Informational Asymmetries and the Law
			3.3 Debt Security Prices and Yields: Sources of Information
		Bonds and Notes
		Bid and Asked Prices and Pricing Information
			3.4 Stock Prices and Dividend Yields: Sources of Information
		Price and Yield Information
		Stock Price Indexes and Foreign Stock Prices
			3.5 Information on Security Issuers
		Moody’s and Standard & Poor’s Reports
		Securities and Exchange Commission (SEC) Reports
		Company Histories
		Dun & Bradstreet Ratings and Risk Management
		Financial Institutions
		Credit Bureaus
			3.6 General Economic and Financial Conditions
		The Federal Reserve System
		Other Domestic and International Sources of Information
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
		Appendix 3A: The Flow of Funds in the Financial System
	4 The Great Credit Crisis and Reregulating the Financial System
		4.1 The Great Credit Crisis of 2007–2009
		4.2 The Facts
		The Stock Market
		The Housing Market
		The Broader Economy: GDP and Unemployment
			4.3 Emergence of the Great Credit Crisis
		The Banking Industry
		Financial Intermediaries
		Capital Requirements
		The Traditional Mortgage Market
		Subprime Mortgages
		Mortgage Derivatives: MBSs and CMOs
		Mortgage-Backed Securities (MBSs)
		Collateralized Mortgage Obligations (CMOs)
		Financial Derivatives beyond the Housing Market
		Credit Default Swaps
			4.4 The Crisis Unfolds
		The Demise of Large Investment Banks
		What Is an Investment Bank?
		Bear Stearns: The First Domino
		Lehman Brothers and Merrill Lynch Were Next
		More Fallout
		The AIG Debacle
			4.5 What’s Next? The Obama Plan
		A Blueprint for Regulatory Reform
		The Obama Plan
		An Eye to the Future
			4.6 In the Aftermath of the Great Credit Crisis of 2007–2009
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
Part 2 Interest Rates and the Prices of Financial Assets
	5 The Determinants of Interest Rates: Competing Ideas
		5.1 Introduction: Interest Rates and the Price of Credit
		5.2 Functions of the Rate of Interest in the Economy
		5.3 The Classical Theory of Interest Rates
		Saving by Households
		Saving by Business Firms
		Saving by Government
		The Demand for Investment Funds
		The Investment Decision-Making Process
		Investment Demand and the Rate of Interest
		The Equilibrium Rate of Interest in the Classical Theory of Interest
		Limitations of the Classical Theory of Interest
			5.4 The Liquidity Preference or Cash Balances Theory of Interest Rates
		The Demand for Liquidity
		Motives for Holding Money (Cash Balances)
		Total Demand for Money (Cash Balances)
		The Supply of Money (Cash Balances)
		The Equilibrium Rate of Interest in Liquidity Preference Theory
		Limitations of the Liquidity Preference Theory
			5.5 The Loanable Funds Theory of Interest
		The Demand for Loanable Funds
		Consumer (Household) Demand for Loanable Funds
		Domestic Business Demand for Loanable Funds
		Government Demand for Loanable Funds
		Foreign Demand for Loanable Funds
		Total Demand for Loanable Funds
		The Supply of Loanable Funds
		Domestic Saving
		Dishoarding of Money Balances
		Creation of Credit by the Domestic Banking System
		Foreign Lending to the Domestic Funds Market
		Total Supply of Loanable Funds
		The Equilibrium Rate of Interest in the Loanable Funds Theory
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
		Appendix 5A: The Rational Expectations Theory of Interest
	6 Measuring and Calculating Interest Rates and Financial Asset Prices
		6.1 Introduction to Interest Rates and Asset Prices
		6.2 Units of Measurement for Interest Rates
		Calculating and Quoting Interest Rates
		Basis Points
			6.3 Interest Rates in the Wholesale Money Markets
		Computing Interest Rates on Money Market Assets That Are Sold at a Discount
		Holding-Period Yield on Money Market Assets Sold at a Discount
		Interest Rate Quotations on U.S. Treasury Bills
			6.4 Interest Rates on Bonds and Other Long-Term Debt Securities
		Yield to Maturity (YTM)
		Holding-Period Yield on Bonds and Other Long-Term Debt Securities
		Understanding the Concepts of Yield to Maturity and Holding-Period Yield
		Price Quotations on U.S. Treasury Notes and Bonds
		Price Quotations on Corporate Bonds
			6.5 Interest Rates and the Prices of Debt Securities
			6.6 Rates of Return on a Perpetual Financial Instrument
		The Rate of Return on Fixed-Income Perpetuities
		Interest Rates and Stock Prices
		Calculating the Holding-Period Yield on Stock
		Price Quotations in Corporate Stock
			6.7 Interest Rates Charged by Institutional Lenders
		The Simple Interest Method
		Add-On Rate of Interest
		Discount Loan Method
		Home Mortgage Interest Rate
		Annual Percentage Rate (APR)
		Compound Interest
		The Annual Percentage Yield (APY) on Deposits
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	7 Inflation, Yield Curves, and Duration: Impact on Interest Rates and Asset Prices
		7.1 Introduction
		7.2 Inflation and Interest Rates
		The Correlation between Inflation and Interest Rates
		Nominal and Real Interest Rates
		The Fisher Effect
		Alternative Views about Inflation and Interest Rates
		Anticipated versus Unanticipated Inflation
		The Inflation-Risk Premium
		The Inflation-Caused Income Tax Effect
		Conclusions from Recent Research on Inflation and Interest Rates
			7.3 Inflation and Stock Prices
			7.4 The Development of Inflation- Adjusted Securities
			7.5 The Maturity of a Loan
		The Yield Curve and the Term Structure of Interest Rates
		Types of Yield Curves
		The Unbiased Expectations Hypothesis
		Assumptions of the Expectations Hypothesis
		Policy Implications of the Unbiased Expectations Hypothesis
		The Liquidity Premium View of the Yield Curve
			7.6 The Segmented-Markets Argument
		The Possible Impact of Segmented Markets on the Yield Curve
		Policy Implications of the Segmented- Markets Theory
		Research Evidence on the Yield Curve
			7.7 Uses of the Yield Curve
		Forecasting Interest Rates and Economic Recessions
		Uses for Financial Intermediaries
		Detecting Overpriced and Underpriced Financial Assets
		Indicating Trade-Offs between Maturity and Yield
		Riding the Yield Curve
			7.8 Duration: A Different Approach to Maturity
		The Price Elasticity of a Bond or Other Debt Security
		The Impact of Varying Coupon Rates
		An Alternative Maturity Index for a Financial Asset: Duration
		The Convexity Factor
		Uses of Duration
		Estimating Asset Price Changes
		Portfolio Immunization
		Limitations of Duration
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	8 The Risk Structure of Interest Rates: Defaults, Prepayments, Taxes, and Other Rate-Determining Risk Factors
		8.1 Introduction
		8.2 Marketability
		8.3 Liquidity
		8.4 Default Risk and Interest Rates
		The Premium for Default Risk
		The Expected Rate of Return or Yield on a Risky Asset
		Anticipated Loss and Default-Risk Premiums
		Factors Influencing Default-Risk Premiums
		Inflation and Default-Risk Premiums
		Yield Curves for Risky Securities
		The Volatile History of Junk Bonds
		The Junk Bond Spread and the Economy
			8.5 New Ways of Dealing with Default Risk: Credit Derivatives
		A Summary of the Default Risk– Interest Rate Relationship
			8.6 Call Privileges and Call Risk
		Calculating the Yields on Called Financial Assets
		Advantages and Disadvantages of the Call Privilege
		The Call Premium and Interest Rate Expectations
		Research Evidence on Call Privileges and Call Risk
			8.7 Prepayment Risk and the Yields on Loan-Backed Securities
			8.8 Taxation of Returns on Financial Assets
		Tax-Exempt Securities
		The Effect of Marginal Tax Rates on After-Tax Yields
		Comparing Taxable and Tax-Exempt Securities
		Treatment of Capital Losses and Capital Gains
			8.9 Convertible Securities
		Advantages for the Convertible Bond Issuer
		Advantages for the Investor in Convertible Bonds
			8.10 The Structure of Interest Rates in the Financial System
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	9 Interest Rate Forecasting and Hedging: Swaps, Financial Futures, and Options
		9.1 Introduction
		9.2 Implicit Interest Rate Forecasts and Asset Prices
		9.3 Interest Rate Swaps
		What Are Swaps?
		How Swaps Work
		The Risks of Swapping
			9.4 Financial Futures Contracts
		The Nature of a Futures Contract and Futures Trading
		Examples of Daily Price Quotations for U.S. Treasury Futures
		Futures on Eurodollar Deposits
		Mark-to-Market Daily
		Why Hedging with Futures Can Be Effective
		Types of Hedges in Futures
		The Long (or Buying) Hedge
		The Short (or Selling) Hedge
		Cross Hedging
		Executing a Trade, the Cash Margin, and the Settlement of the Contract
		Payoff Diagrams for Long and Short Futures Contracts
		Futures Contracts Offered on Exchanges Today
			9.5 Option Contracts
		Basic Types of Option Contracts and Price Quotations
		Examples of Price Quotes on Options Contracts
		Uses of Options
		Protecting against Declining Investment Yields
		Protecting against Rising Interest Rates
		Payoff Diagrams for Valuing Options
		Reading Stock Options
		Put-Call Parity
		Options Offered on Exchanges Today
			9.6 Exchanges Where Futures and Options Contracts Are Traded
			9.7 Risks, Costs, and Rules for Trading in Derivatives
		Risks and Costs Associated with Futures and Options
		Accounting Rules for Transactions Involving Derivatives
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
		Appendix 9A: The Black-Scholes Model for Valuing Options
Part 3 Money Market Institutions, Central Banking, and the Fed
	10 Introduction to the Money Market and Its Institutions
		10.1 Introduction: The Market for Short-Term Credit
		10.2 Characteristics of the Money Market
		What the Money Market Does
		The Need for a Money Market
		Key Borrowers and Lenders in the Money Market
		The Goals of Money Market Investors
		Types of Investment Risk That Investors Face
		Money Market Maturities
		Depth and Breadth of the Money Market
		The Speed of Money Market Payments: Federal Funds versus Clearinghouse Funds
		A Market for Large Borrowers and Lenders
			10.3 Government Involvement in the Money Market
		The Roles Governments Play in the Money Market
		Selling Treasury Bills to Money Market Investors: The Anchor of the Money Market
		Volume of Bills Outstanding
		Types of Treasury Bills
		How Bills Are Sold
		Results of a Recent Bill Auction
		Market Interest Rates on Treasury Bills
		Investors in Treasury Bills
			10.4 Primary Dealers in Government Securities
			10.5 Dealer Borrowing and Lending Activities in the Money Market
		Demand Loans for Dealers
		Repurchase Agreements (RPs) for Dealers and Other Money Market Participants
		A New Type of RP: The GCF Repo
		Sources of Dealer Income
		Dealer Positions in Securities
		Dealer Transactions and Government Security Brokers
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	11 Commercial Banks, Major Corporations, and Federal Credit Agencies in the Money Market
		11.1 Introduction
		11.2 The Roles Played by Banks in the Money Market
		11.3 Federal Funds Provided by the Banking System
		The Nature of Federal Funds and Their Uses
		Use of the Federal Funds Market to Meet Reserve Requirements
		Mechanics of Federal Funds Trading
		Volume of Borrowings in the Funds Market
		Interest Rates on Federal Funds
		Federal Funds and Government Economic Policy
			11.4 Negotiable Certificates of Deposit (CDs) Issued by Banks
		Terms Attached to CDs and Who Buys Them
		Buyers of CDs
		New Types of CDs
			11.5 Eurocurrency Deposits in International Banks
		What Is a Eurodollar?
		The Creation of Eurocurrency Deposits
		Eurocurrency Maturities and Risks
		The Supply of Eurocurrency Deposits
		Eurodollars in U.S. Domestic Bank Operations
		Recent Innovations in the Eurocurrency Markets
		Benefits and Costs of the Eurocurrency Markets
			11.6 Bankers Acceptances
		How Bankers Acceptances Are Used in International Trade
		Bankers Acceptances as Investment Instruments
		The Decline in Bankers Acceptances
			11.7 Evaluating the Money Market Costs of Funds Needed by Bankers
			11.8 Concluding Comment on Bank Activity in the Money Market
			11.9 Major Corporations in the Money Market: Commercial Paper
		The Nature of Commercial Paper
		Types of Commercial Paper
		The Recent Track Record of Commercial Paper
		Commercial Paper as Investment Instruments
		Advantages of Issuing Commercial Paper
		Possible Disadvantages from Issuing Commercial Paper
		Who Buys Commercial Paper?
		Asset-Backed Commercial Paper
		Continuing Innovations in the Paper Market
		Commercial Paper Ratings and Dealer Operations
		Dealers in Paper
			11.10 Credit Agencies in the Money Market
		Types of Federal Credit Agencies
		Growth of the Agency Security Market
		Characteristics and Marketing of Agency Securities
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	12 Roles and Services of the Federal Reserve and Other Central Banks around the World
		12.1 Introduction to Central Banking
		12.2 The Roles of Central Banks in the Economy and Financial System
		Control of the Money Supply to Avoid Severe Inflation
		Stabilizing the Money and Capital Markets
		Lender of Last Resort and Supervisor of the Banking System
		Maintaining and Improving the Payments Mechanism
			12.3 The Goals and Channels of Central Banking
		Central Banks’ Goals
		Challenges in Achieving Central Banks’ Goals
		The Channels through Which Central Banks Work
			12.4 History of the Federal Reserve System—Central Bank of the United States
		Problems in the Early U.S. Banking System
		Creation of the Federal Reserve System
		The Early Structure of the Federal Reserve
		Goals and Policy Tools of the Fed
			12.5 How the Fed Is Organized Today
		The Board of Governors
		The Federal Open Market Committee
		The Federal Reserve Banks
		The Member Banks of the Federal Reserve System
			12.6 Roles of the Federal Reserve System Today
		The Clearing and Collection of Checks and Other Payments Media
		Issuing Currency and Coin and Related Services
		Maintaining a Sound Banking and Financial System
		Serving as the Federal Government’s Fiscal Agent
		Providing Information to the Public
		Carrying Out Monetary Policy
			12.7 The Key Focus of Central Bank Monetary Policy: Interest Rates, Reserves, and Money
			12.8 Reserve Composition and the Deposit and Money Multipliers
		The Deposit Multiplier
		The Money Multiplier
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	13 The Tools and Goals of Central Bank Monetary Policy
		13.1 Introduction to the Tools and Goals of Monetary Policy
		13.2 General versus Selective Credit Controls
		13.3 General Credit Controls in Central Banking
		Open Market Operations
		Effects of Open Market Operations on Interest Rates
		Effects of Open Market Operations on Reserves
		How Open Market Operations Are Conducted in the United States
		Types of Open Market Operations
		Goals of Open Market Operations: Defensive and Dynamic
		Changes in the Federal Reserve’s Discount Rate
		Borrowing and Repaying Discount Window Loans
		Effects of a Discount Rate Change
		Term Auction Facility
		Reserve Requirements
		Effects of a Change in Deposit Reserve Requirements
		An Illustration
		Current Levels of Reserve Requirements
			13.4 Selective Credit Controls Used in Central Banking
		Moral Suasion by Central Bank Officials
		Margin Requirements
			13.5 Interest Rate Targeting
		The Federal Funds Rate
		Fed Funds Targeting and Long-Term Interest Rates
		An Alternative to Interest Rate Targeting: Quantitative Easing
			13.6 The Federal Reserve and Economic Goals
		The Goal of Controlling Inflation
		Central Bank Targeting of Inflation
		Deflation
		Hyperinflation
		The Goals of Full Employment and Stable Economic Growth
		The Natural Rate of Unemployment
		The Output Gap
			13.7 The Conflicting Goals and the Limitations of Monetary Policy
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
Part 4 Financial Institutions: Organization, Performance, and Regulation
	14 Financial Institutions: Commercial Banks
		14.1 Introduction to Banking
		14.2 The Structure of U.S. Commercial Banking
		A Trend toward Consolidation
		Falling Industry Numbers as Small Banks Are Taken Over by Larger Ones and Some Big Banks Are Declared Too Big to Fail (TBTF)
		A Countertrend: Both Small and Large Banks May Survive in the Future
		Economies of Scale Support a Consolidating Industry
		Branch Banking
		Bank Holding Companies (BHCs)
		Financial Holding Companies (FHCs)
		International Banking
			14.3 The Convergence Trend in Banking
		Bank Failures
		Changing Technology
			14.4 Portfolio Characteristics of Commercial Banks
		Balance Sheet Items
		Cash and Due from Banks (Primary Reserves)
		Investment Security Holdings and Secondary Reserves
		Loans
		Loan Loss Allowances and Loan Risk
		Deposits
		Nondeposit Sources of Funds
		Equity Capital
		Income Statement Items
		Revenues and Expenses
		Interest and Noninterest Margins
			14.5 Managing Commercial Bank Performance Today
		Managing Bank Assets, Liabilities, Revenues, and Expenses
		Monitoring the Performance of a Bank
			14.6 Money Creation and Destruction by Banks and Bank Accounting Methods
		The Creation of Money and Credit
		Destruction of Deposits and Reserves
		Implications of Money Creation and Destruction
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	15 Financial Institutions: Thrifts
		15.1 Introduction to Thrift Institutions
		15.2 Savings and Loan Associations (S&Ls)
		Origins of S&Ls
		How Funds Are Raised and Allocated
		Asset Portfolios
		Liabilities of S&Ls
		Trends in Revenues and Costs
		Possible Ways to Strengthen the S&L Industry in the Future
			15.3 Savings Banks (SBs)
		Number and Distribution of Savings Banks and Regulatory Supervision
		How Funds Are Raised and Allocated
		Current Trends and Future Problems
			15.4 Credit Unions (CUs)
		Credit Union Membership
		Size of Credit Unions
		New Services Offered
		A Strong Competitive Force
			15.5 Money Market Funds (MMFs)
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	16 Financial Institutions: Nondeposit Intermediaries
		16.1 Introduction
		16.2 Mutual Funds (or Investment Companies)
		The Background of Investment Companies
		Bonds and Money Market Funds
		Stock Funds
		Index and Exchange-Traded Funds
		Hybrid Funds and Funds of Funds
		Global and Vulture Funds
		Small-Cap to Large-Cap Funds
		Life-Cycle and Life-Style Funds
		Hedge Funds
		Tax and Regulatory Status of the Industry
		Open-End and Closed-End Investment Companies
		Changing Investment Strategies
		Goals and Earnings of Investment Companies
		Scandal Envelops the Mutual Fund Industry
			16.3 Pension Funds
		Types of Pension Funds
		Defined-Benefit and Contribution Plans
		Cash-Balance Pension Funds
		Growth of Pension Funds
		Investment Strategies of Pension Funds
		Pension Fund Assets
		Factors Affecting the Future Growth of Pension Funds
			16.4 Life Insurance Companies
		The Insurance Principle
		Investments of Life Insurance Companies
		Sources of Life Insurance Company Funds
		Structure and Growth of the Life Insurance Industry
		New Services
			16.5 Property-Casualty Insurance Companies
		Makeup of the Property-Casualty (P/C) Insurance Industry
		Changing Risk Patterns in Property/ Casualty Coverage
		Investments by Property-Casualty (P/C) Companies
		Sources of Income
		Business Cycles, Inflation, and Competition
			16.6 Finance Companies
		Different Finance Companies for Different Purposes
		Growth of Finance Companies
		Methods of Industry Financing
		Recent Changes in the Character of the Finance Company Industry
		Consolidation in the Industry
		New Types of Finance Companies
			16.7 Investment Banks
		The Underwriting Function of Investment Banks
		Other Investment Banking Services
		Leading Investment Banks and the Convergence of Commercial and Investment Banking
			16.8 Other Important Financial Institutions
			16.9 Trends Affecting All Financial Institutions Today
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	17 Financial Institutions: Regulation
		17.1 Introduction to the Regulation of Financial Institutions
		17.2 The Reasons behind the Regulation of Financial Institutions
		Does Regulation Benefit or Harm Financial Institutions?
			17.3 The Regulation of Commercial Banks
		The Federal Reserve System (The Fed)
		Office of the Comptroller of the Currency (The OCC)
		Federal Deposit Insurance Corporation (FDIC)
		State Banking Commissions
		Opening Competition across Political Boundaries
		Regulation of the Services Banks Can Offer
		The Gramm-Leach-Bliley (GLB) Act
		The Rise of Disclosure and Privacy Laws in Banking
		The Growing Importance of Capital Regulation in Banking
		Basel I
		Basel II
		The Unfinished Agenda for Banking Regulation
			17.4 The Regulation of Thrift Institutions
		Credit Unions
		Savings and Loans
		Savings Banks
		Money Market Funds (MMFs)
			17.5 The Regulation of Insurance Companies
			17.6 The Regulation of Pension Funds
			17.7 The Regulation of Finance Companies
			17.8 The Regulation of Investment Companies (Mutual Funds)
			17.9 An Overview of Trends in the Regulation of Financial Institutions
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
Part 5 Governments and Businesses in the Financial Markets
	18 Governments Operating in the Financial Markets
		18.1 Introduction to the Role of Governments in the Financial Marketplace
		18.2 Federal Government Activity in the Financial System
		The Treasury Department in the Financial Marketplace
		The Fiscal Policy Activities of the Treasury
		Sources of Federal Government Funds
		Federal Government Expenditures
		Effects of Government Borrowing on the Financial System and the Economy
		Management of the Federal Debt
		The Size and Growth of the Public Debt
		The Composition of the Public Debt
		Marketable Public Debt
		Nonmarketable Public Debt
		Investors in U.S. Government Securities
		Methods of Offering Treasury Securities
		The Auction Method
		Types of Treasury Auctions
		Marketing Techniques
		Book Entry
		Other Services Offered Investors
		On-the-Run and Off-the-Run Treasury Securities
		Treasury Interest Rates as Global Benchmarks for Other Interest Rates
		The Goals of Federal Debt Management
		Minimize Interest Costs
		Economic Stabilization
		The Impact of Federal Debt Management on the Financial Markets and the Economy
			18.3 State and Local Governments in the Financial Markets
		Growth of State and Local Government Borrowing
		Sources of Revenue for State and Local Governments
		State and Local Government Expenditures
		Motivations for State and Local Government Borrowing
		Types of Securities Issued by State and Local Governments
		Short-Term Securities
		Long-Term Securities
		Types of Revenue Bonds
		Innovations in Municipal Securities
		Key Features of Municipal Debt
		Tax Exemption
		Exemption Contributes to Market Volatility
		Credit Ratings
		Serialization
		How Municipal Bonds Are Marketed
		Problems in the Municipal Market
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	19 Businesses Borrowing in the Financial Markets
		19.1 Introduction to Business Borrowing
		19.2 Factors Affecting Business Activity in the Financial Markets
		19.3 Characteristics of Corporate Notes and Bonds
		Principal Features of Corporate Notes and Bonds
		Recent Trends in Original Maturities of Corporate Bonds
		Call Privileges Attached to Corporate Bonds
		Sinking Fund Provisions
		Yields and Costs of Corporate Bonds
		Signals Corporate Bond Issues May Send to the Financial Marketplace
		The Most Common Types of Corporate Bonds
		Debentures
		Subordinated Debentures
		Mortgage Bonds
		Income Bonds
		Equipment Trust Certificates
		Industrial Development Bonds
		Innovations in Corporate Debt
			19.4 Asset-Backed Securities Issued by Corporations
			19.5 Investors in Corporate Debt
			19.6 The Secondary Market for Corporate Debt
			19.7 The Marketing of Corporate Debt
		Public Sales
		Private Placements
			19.8 The Volume of Borrowing by Corporations
			19.9 Bank Loans to Business Firms
		The Volume of Bank Credit Supplied to Businesses
		The Prime, or Base, Interest Rate on Business Loans
		Other Examples of Base Rates for Business Loans
			19.10 Commercial Mortgages
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	20 The Market for Corporate Stock
		20.1 Introduction to the Stock Market
		20.2 Characteristics of Corporate Stock
		Common Stock
		Preferred Stock
			20.3 Stock Market Investors
			20.4 Equity as a Source of Funding
		Retained Earnings
		Debt and Equity Mix
		Equity Buybacks
			20.5 Price Discovery in the Equity Markets
		Organized Exchanges
		Foreign Exchanges
		Contributions of Exchanges
		Over-the-Counter (OTC) Markets
		Evolving Trading Platforms
			20.6 The Third Market: Trading in Listed Securities off the Exchanges
			20.7 The Private Equity Market
			20.8 Investment Banking and the Sale of New Stock
			20.9 The Development of a Unified International Market for Stock
		The National Market System
		NASD and Automated Price Quotations
		The Advent of Shelf Registration
		Global Trading in Equities
		The Development of ADRs
			20.10 Valuing Stocks: Alternative Approaches
		Technical and Fundamental Analysis
		Private Information and Anomalies
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
Part 6 Consumers in the Financial Markets
	21 Household Financial Services and Institutions
		21.1 Introduction to Consumer Lending and Borrowing
		21.2 Consumers as Lenders of Funds
		Financial Assets Purchased by Consumers
		Recent Innovations in Consumer Savings Instruments
			21.3 Consumers as Borrowers of Funds
		Is Consumer Borrowing Excessive?
		Categories of Consumer Borrowing
			21.4 Home Equity Loans
			21.5 Credit and Debit Cards
		Credit Cards
		Debit Cards
			21.6 The Determinants of Consumer Borrowing
			21.7 Key Consumer Lending Institutions
		Commercial Banks
		Finance Companies
		Other Consumer Lenders: Credit Unions, Savings Associations, and Small Loan Companies
			21.8 Factors Considered in Making Consumer Loans
			21.9 Credit Scoring Techniques
			21.10 Financial Disclosure and Consumer Credit
		Truth in Lending
		Fair Credit Billing Act
		Fair Credit Reporting Act
		Consumer Leasing Act
		Competitive Banking Equality Act
		Fair Credit and Charge Card Disclosure Act
		Truth in Savings Act
		The Financial Services Modernization (Gramm-Leach-Bliley) Act
		The Credit Card Act of
		(CARD)
		Identity Theft
			21.11 Credit Discrimination Laws
		Community Reinvestment Act and Financial Institutions Reform, Recovery, and Enforcement Act
		Equal Credit Opportunity Act
		Fair Housing and Home Mortgage Disclosure Acts
			21.12 Bankruptcy Law Changes Affecting Households
			21.13 Rough Times for Household Borrowers
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	22 The Residential Mortgage Market
		22.1 Introduction to the Residential Mortgage Market
		22.2 Recent Trends in New Home Prices and the Terms of Mortgage Loans
		22.3 The Structure of the Mortgage Market
		Volume of Mortgage Loans
		Residential versus Nonresidential Mortgage Loans
			22.4 Mortgage-Lending Institutions
			22.5 The Roles Played by Leading Financial Institutions in the Mortgage Market
		Savings and Loan Associations
		Commercial Banks
		Life Insurance Companies
		Savings Banks
		Mortgage Bankers
			22.6 Government Activity in the Mortgage Market
		The Impact of the Great Depression on Government Involvement in the Mortgage Market
		Launching the Federal Home Loan Bank System
		Setting Up the Federal Housing Administration (FHA) and the Veterans Administration (VA)
		The Creation of Fannie Mae—A Government-Sponsored Enterprise (GSE)
		The Creation of Ginnie Mae (GNMA)
		GNMA Mortgage-Backed Securities
		The Federal Home Loan Mortgage Corporation—Another Government- Sponsored Enterprise (GSE)
		FHLMC Mortgage-Backed Securities
		Freddie and Fannie Face Serious Problems
		Collateralized Mortgage Obligations (CMOs) and Real Estate Mortgage Investment Conduits (REMICs)
		Impact of Securitized Mortgages
			22.7 Innovations in Mortgage Instruments
		Fixed-Rate Home Mortgages—The Oldest Form of Home Loan
		Variable-Rate and Adjustable Mortgage Instruments
		Interest-Only Mortgages
		Reverse-Annuity Mortgages
		Epilogue on the Fixed-Rate Mortgage
			22.8 Pricing and Other Issues in Home Mortgage Lending
		Pricing Home Mortgages and the Treasury Security Market
		Mortgage Lock-Ins, Loan Modifications, and Foreclosures
		Refinancing Home Mortgages and “Cash Outs”
		Predatory Lending
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
Part 7 The International Financial System
	23 International Transactions and Currency Values
		23.1 Introduction to International Transactions and Currency Values
		23.2 The Balance-of-Payments (BOP) Accounts
		The U.S. Balance of International Payments
		The Current Account
		The Merchandise Trade Balance in the Current Account
		The Service Balance in the Current Account
		Investment Income Receipts and Payments in the Current Account
		Compensation of Employees in the Current Account
		Unilateral Transfers in the Current Account
		The Balance on Current Account
		The Capital and Financial Accounts
		Official Transactions
		Disequilibrium in the Balance of Payments
			23.3 The Problem of Different Monetary Units in International Trade and Finance
		The Gold Standard
		The Gold Exchange Standard
		The Modified Exchange Standard
		The Managed Floating Currency Standard
			23.4 Determining Foreign Currency Values
		Essential Features of the Foreign Exchange Market
		Exchange Rate Quotations
		Factors Affecting Foreign Exchange Rates
		BOP Position
		Speculation
		Domestic Political and Economic Conditions
		Purchasing Power Parity
		Central Bank Intervention
		Supply and Demand for Foreign Exchange
			23.5 The Forward Market for Currencies
		Methods of Quoting Forward Exchange Rates
			23.6 Functions of the Forward Exchange Market
		Commercial Covering
		Hedging an Investment Position
		Speculation on Future Currency Prices
		Covered Interest Arbitrage
		The Principle of Interest Rate Parity
			23.7 The Market for Foreign Currency Futures
		The Buying Hedge
		The Selling Hedge
			23.8 Other Innovative Methods for Dealing with Currency Risk
			23.9 Government Intervention in the Foreign Exchange Markets
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
	24 International Banking Institutions
		24.1 Introduction to International Banking
		24.2 The Scope of International Banking Activities
		Multinational Banking Corporations
		Types of Facilities Operated by Banks Abroad
		Choosing the Right Kind of Facility to Serve Foreign Markets
			24.3 Services Offered by International Banks
		Issuing Letters of Credit
		Buying and Selling Foreign Exchange (FOREX)
		Accepting Eurocurrency Deposits and Making Eurocurrency Loans
		Marketing and Underwriting of Both Domestic and Eurocurrency Bonds, Notes, and Equity Shares
		Securitizing Loans
		Advisory Services Provided by International Banks
		Universal Banking Services and One- Stop Shopping
			24.4 Foreign Banks Operating in the United States
		The Growth of Foreign Bank Activity in the United States
		Federal Regulation of Foreign Bank Activity
			24.5 Regulation of the International Banking Activities of U.S. Banks
			24.6 The Future of International Banking
		The Risks of International Lending
		Political and Currency Risk
		Geographic Distribution of International Bank Lending
		Public Confidence and Protecting Against Bank Failures
		The Spread of Deregulation: How Fast Should We Go?
			24.7 Prospects and Challenges for the Twenty-First Century
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
Part 8 Financial Institutions and Markets of the Future
	25 The Future of the Financial System
		25.1 Introduction: The Financial System in Change
		25.2 Financial Forces Reshaping the Financial System Today
		25.3 Economic and Demographic Forces Reshaping the Financial System
		25.4 The Challenges and Opportunities Presented by Recent Trends
		Dealing with Risk in the Financial System: Ensuring the Strength of Financial Institutions and Increasing Public Confidence
		The Consequences of Reduced Public Confidence
		Ways to Promote Public Confidence in Financial Institutions and Reduce Risk in the Financial System
		Developing Better Management Tools to Deal with Risk
		The Information Problem
		The Effect of New Technology on the Design and Delivery of Financial Services
		The Information Revolution
		Recent Technological Advances
		Public Attitudes and Cost
		The Changing Mix of Financial- Service Suppliers in the Financial System
		Price Sensitivity and Local Competition
		Importance of Established Delivery Systems
		New Financial Institutions and Instruments
		Securitization
		Consolidations and Convergences within the Financial System
			25.5 New Organizational Forms and a New Role for Regulation and Supervision in an Age of Financial-Services’ Consolidation, Convergence, and Economic Turmoil
		New Organizational Form
		New Regulatory Approaches
		Too Big to Fail
		Disclosure and International Cooperation
			25.6 The Payments System: Current and Future
			25.7 The Current and Future Need for Regulation of Financial Institutions
		Financial-Service Regulations That Could Grow
		Financial Disclosure
		Privacy Protection and Identity Theft
		Social Responsibility
		Promoting a Level Playing Field
		Summary of the Chapter’s Main Points
		Key Terms Appearing in This Chapter
		Problems and Issues
		Web-Based Problems
		Selected References to Explore
		Financial Institutions and Markets Dictionary D-
	Index