Financial markets and institutions

Cover
Financial Markets and Institutions
Dedication
About the Authors
Preface
Acknowledgments
Contents in Brief
Contents
Part 1: Introduction and Overview of Financial Markets
	1: Introduction
		Why Study Financial Markets and Institutions? Chapter Overview
		Overview of Financial Markets
			Primary Markets versus Secondary Markets
			Money Markets versus Capital Markets
			Foreign Exchange Markets
			Derivative Security Markets
			Financial Market Regulation
		Overview of Financial Institutions
			Unique Economic Functions Performed by Financial Institutions
			Additional Benefits FIs Provide to Suppliers of Funds
			Economic Functions FIs Provide to the Financial System as a Whole
			Risks Incurred by Financial Institutions
			Regulation of Financial Institutions
			Trends in the United States
		Globalization of Financial Markets and Institutions
		Appendix 1: The Financial Crisis: The Failure of Financial Institutions’ Specialness
	2: Determinants of Interest Rates
		Interest Rate Fundamentals: Chapter Overview
		Loanable Funds Theory
			Supply of Loanable Funds
			Demand for Loanable Funds
			Equilibrium Interest Rate
			Factors That Cause the Supply and Demand Curves for Loanable Funds to Shift
		Movement of Interest Rates over Time
		Determinants of Interest Rates for Individual Securities
			Inflation
			Real Risk-Free Rates
			Default or Credit Risk
			Liquidity Risk
			Special Provisions or Covenants
			Term to Maturity
		Term Structure of Interest Rates
			Unbiased Expectations Theory
			Liquidity Premium Theory
			Market Segmentation Theory
		Forecasting Interest Rates
		Time Value of Money and Interest Rates
			Time Value of Money
			Lump Sum Valuation
			Annuity Valuation
	3: Interest Rates and Security Valuation
		Interest Rates as a Determinant of Financial Security Values: Chapter Overview
		Various Interest Rate Measures
			Coupon Rate
			Required Rate of Return
			Expected Rate of Return
			Required versus Expected Rates of Return: The Role of Efficient Markets
			Realized Rate of Return
		Bond Valuation
			Bond Valuation Formula Used to Calculate Fair Present Values
			Bond Valuation Formula Used to Calculate Yield to Maturity
		Equity Valuation
			Zero Growth in Dividends
			Constant Growth in Dividends
			Supernormal (or Nonconstant) Growth in Dividends
		Impact of Interest Rate Changes on Security Values
		Impact of Maturity on Security Values
			Maturity and Security Prices
			Maturity and Security Price Sensitivity to Changes in Interest Rates
		Impact of Coupon Rates on Security Values
			Coupon Rate and Security Price
			Coupon Rate and Security Price Sensitivity to Changes in Interest Rates
		Duration
			A Simple Illustration of Duration
			A General Formula for Duration
			Features of Duration
			Economic Meaning of Duration
			Large Interest Rate Changes and Duration
		Appendix 3A: Duration and Immunization
		Appendix 3B: More on Convexity
	4: The Federal Reserve System, Monetary Policy, and Interest Rates
		Major Duties and Responsibilities of the Federal Reserve System: Chapter Overview
		Structure of the Federal Reserve System
			Organization of the Federal Reserve System
			Board of Governors of the Federal Reserve System
			Federal Open Market Committee
			Functions Performed by Federal Reserve Banks
			Balance Sheet of the Federal Reserve
		Monetary Policy Tools
			Open Market Operations
			The Discount Rate
			Reserve Requirements (Reserve Ratios)
		The Federal Reserve, the Money Supply, and Interest Rates
			Effects of Monetary Tools on Various Economic Variables
			Money Supply versus Interest Rate Targeting
		International Monetary Policies and Strategies
			Systemwide Rescue Programs Employed during the Financial Crisis
			Challenges Remain after the Crisis
Part 2: Securities Markets
	5: Money Markets
		Definition of Money Markets: Chapter Overview
		Money Markets
		Yields on Money Market Securities
			Bond Equivalent Yields
			Effective Annual Return
			Discount Yields
			Single-Payment Yields
		Money Market Securities
			Treasury Bills
			Federal Funds
			Repurchase Agreements
			Commercial Paper
			Negotiable Certificates of Deposit
			Banker’s Acceptances
			Comparison of Money Market Securities
		Money Market Participants
			The U.S. Treasury
			The Federal Reserve
			Commercial Banks
			Money Market Mutual Funds
			Brokers and Dealers
			Corporations
			Other Financial Institutions
			Individuals
		International Aspects of Money Markets
			Euro Money Markets
		Appendix 5A: Single versus Discriminating Price Treasury Auctions
		Appendix 5B: Creation of a Banker’s Acceptance
	6: Bond Markets
		Definition of Bond Markets: Chapter Overview
		Bond Market Securities
			Treasury Notes and Bonds
			Municipal Bonds
			Corporate Bonds
			Bond Ratings and Interest Rate Spreads
			Bond Market Indexes
		Bond Market Participants
		Comparison of Bond Market Securities
		International Aspects of Bond Markets
			Eurobonds, Foreign Bonds, and Sovereign Bonds
	7: Mortgage Markets
		Mortgages and Mortgage-Backed Securities: Chapter Overview
		Primary Mortgage Market
			Mortgage Characteristics
			Mortgage Amortization
			Other Types of Mortgages
		Secondary Mortgage Markets
			History and Background of Secondary Mortgage Markets
			Mortgage Sales
			Mortgage-Backed Securities
		Participants in the Mortgage Markets
		International Trends in Securitization
		Appendix 7A: Amortization Schedules for 30-Year Mortgage in Example 7–2 and No-Points versus Points Mortgages in Example 7–4
	8: Stock Markets
		The Stock Markets: Chapter Overview
		Stock Market Securities
			Common Stock
			Preferred Stock
		Primary and Secondary Stock Markets
			Primary Stock Markets
			Secondary Stock Markets
			Stock Market Indexes
		Stock Market Participants
		Other Issues Pertaining to Stock Markets
			Economic Indicators
			Market Efficiency
			Stock Market Regulations
		International Aspects of Stock Markets
		Appendix 8A: The Capital Asset Pricing Model
		Appendix 8B: Event Study Tests
	9: Foreign Exchange Markets
		Foreign Exchange Markets and Risk: Chapter Overview
		Background and History of Foreign Exchange Markets
		Foreign Exchange Rates and Transactions
			Foreign Exchange Rates
			Foreign Exchange Transactions
			Return and Risk of Foreign Exchange Transactions
			Role of Financial Institutions in Foreign Exchange Transactions
		Interaction of Interest Rates, Inflation, and Exchange Rates
			Purchasing Power Parity
			Interest Rate Parity
		Appendix 9A: Balance of Payment Accounts
	10: Derivative Securities Markets
		Derivative Securities: Chapter Overview
		Forwards and Futures
			Spot Markets
			Forward Markets
			Futures Markets
		Options
			Call Options
			Put Options
			Option Values
			Option Markets
		Regulation of Futures and Options Markets
		Swaps
			Interest Rate Swaps
			Currency Swaps
			Credit Swaps
			Swap Markets
		Caps, Floors, and Collars
		International Aspects of Derivative Securities Markets
		Appendix 10A: Black–Scholes Option Pricing Model
Part 3: Commercial Banks
	11: Commercial Banks
		Commercial Banks as a Sector of the Financial  Institutions Industry: Chapter Overview
		Definition of a Commercial Bank
		Balance Sheets and Recent Trends
			Assets
			Liabilities
			Equity
			Off-Balance-Sheet Activities
			Other Fee-Generating Activities
		Size, Structure, and Composition of the Industry
			Bank Size and Concentration
			Bank Size and Activities
		Industry Performance
		Regulators
			Federal Deposit Insurance Corporation
			Office of the Comptroller of the Currency
			Federal Reserve System
			State Authorities
		Global Issues
			Advantages and Disadvantages of International Expansion
			Global Banking Performance
	12: Commercial Banks’ Financial Statements and Analysis
		Why Evaluate the Performance of Commercial Banks?  Chapter Overview
		Financial Statements of Commercial Banks
			Balance Sheet Structure
			Off-Balance-Sheet Assets and Liabilities
			Other Fee-Generating Activities
			Income Statement
			Direct Relationship between the Income Statement and the Balance Sheet
		Financial Statement Analysis Using a Return on Equity Framework
			Return on Equity and Its Components
			Return on Assets and Its Components
			Other Ratios
		Impact of Market Niche and Bank Size on Financial Statement Analysis
			Impact of a Bank’s Market Niche
			Impact of Size on Financial Statement Analysis
	13: Regulation of Commercial Banks
		Specialness and Regulation: Chapter Overview
		Types of Regulations and the Regulators
			Safety and Soundness Regulation
			Monetary Policy Regulation
			Credit Allocation Regulation
			Consumer Protection Regulation
			Investor Protection Regulation
			Entry and Chartering Regulation
			Regulators
		Regulation of Product and Geographic Expansion
			Product Segmentation in the U.S. Commercial Banking Industry
			Geographic Expansion in the U.S. Commercial Banking Industry
		Bank and Savings Institution Guarantee Funds
			The Federal Deposit Insurance Corporation (FDIC)
			The Demise of the Federal Savings and Loan  Insurance  Corporation (FSLIC)
			Reform of Deposit Insurance
			Non–U.S. Deposit Insurance Systems
		Balance Sheet Regulations
			Regulations on Commercial Bank Liquidity
			Regulations on Capital Adequacy (Leverage)
		Foreign Versus Domestic Regulation of Commercial Banks
			Product Diversification Activities
			Global or International Expansion Activities
		Appendix 13A: Calculation of Deposit Insurance Premiums
		Appendix 13B: Calculating Minimum Required Reserves at U.S. Depository Institutions
		Appendix 13C: Primary Regulators of Depository Institutions
		Appendix 13D: Deposit Insurance Coverage for Commercial Banks in Various Countries
		Appendix 13E: Calculating Risk-Based Capital Ratios
Part 4: Other Financial Institutions
	14: Other Lending Institutions
		Other Lending Institutions: Chapter Overview
		Savings Institutions
			Size, Structure, and Composition of the Industry
			Balance Sheets and Recent Trends
			Regulators
			Savings Institution Recent Performance
		Credit Unions
			Size, Structure, and Composition of the Industry
			Balance Sheets and Recent Trends
			Regulators
			Industry Performance
		Finance Companies
			Size, Structure, and Composition of the Industry
			Balance Sheets and Recent Trends
			Industry Performance
			Regulation
		Global Issues
	15: Insurance Companies
		Two Categories of Insurance Companies: Chapter Overview
		Life Insurance Companies
			Size, Structure, and Composition of the Industry
			Balance Sheets and Recent Trends
			Regulation
		Property–Casualty Insurance Companies
			Size, Structure, and Composition of the Industry
			Balance Sheets and Recent Trends
			Regulation
		Global Issues
	16: Securities Firms and Investment Banks
		Services Offered by Securities Firms Versus  Investment Banks: Chapter Overview
		Size, Structure, and Composition of the Industry
		Securities Firm and Investment Bank Activity Areas
			Investment Banking
			Venture Capital
			Market Making
			Trading
			Investing
			Cash Management
			Mergers and Acquisitions
			Other Service Functions
		Recent Trends and Balance Sheets
			Recent Trends
			Balance Sheets
		Regulation
		Global Issues
	17: Investment Companies
		Investment Companies: Chapter Overview
		Size, Structure, and Composition of the Mutual Fund Industry
			Historical Trends
			Different Types of Mutual Funds
			Other Types of Investment Company Funds
		Mutual Fund Returns and Costs
			Mutual Fund Prospectuses and Objectives
			Investor Returns from Mutual Fund Ownership
			Mutual Fund Costs
		Mutual Fund Balance Sheets and Recent Trends
			Long-Term Funds
			Money Market Funds
		Mutual Fund Regulation
		Mutual Fund Global Issues
		Hedge Funds
			Types of Hedge Funds
			Fees on Hedge Funds
			Offshore Hedge Funds
			Regulation of Hedge Funds
	18: Pension Funds
		Pension Funds Defined: Chapter Overview
		Size, Structure, and Composition of the Industry
			Defined Benefit versus Defined Contribution Pension Funds
			Insured versus Noninsured Pension Funds
			Private Pension Funds
			Public Pension Funds
		Financial Asset Investments and Recent Trends
			Private Pension Funds
			Public Pension Funds
		Regulation
		Global Issues
		Appendix 18A: Calculation of Growth in IRA Value during an  Individual’s Working Years
	19: Fintech Companies
		Introduction
		The Evolution of Fintech
		Changing Relationship Between Banks and Fintechs
			Banking-as-a-Service
		The Types of Fintech Innovations
			Payments, Clearing, and Settlement Services
			Market Support Services
			Credit, Deposit, and Capital-Raising Services
			Investment Management Services
		Regulatory Approaches to Fintech
			Fintech Charters and Other Licenses
			International Regulations
Part 5: Risk Management in Financial Institutions
	20: Types of Risks Incurred by Financial Institutions
		Why Financial Institutions Need to Manage Risk: Chapter Overview
		Credit Risk
		Liquidity Risk
		Interest Rate Risk
		Market Risk
		Off-Balance-Sheet Risk
		Foreign Exchange Risk
		Country Or Sovereign Risk
		Technology and Operational Risk
		Fintech Risk
		Insolvency Risk
		Other Risks and Interaction Among Risks
	21: Managing Credit Risk on the Balance Sheet
		Credit Risk Management: Chapter Overview
		Credit Quality Problems
		Credit Analysis
			Real Estate Lending
			Consumer (Individual) and Small-Business Lending
			Mid-Market Commercial and Industrial Lending
			Large Commercial and Industrial Lending
		Calculating the Return on a Loan
			Return on Assets (ROA)
			RAROC Models
		Appendix 21: Loan Portfolio Risk and Management
	22: Managing Liquidity Risk on the Balance Sheet
		Liquidity Risk Management: Chapter Overview
		Causes of Liquidity Risk
		Liquidity Risk and Depository Institutions
			Liability-Side Liquidity Risk
			Asset-Side Liquidity Risk
			Measuring a DI’s Liquidity Exposure
			Liquidity Risk, Unexpected Deposit Drains, and Bank Runs
			Bank Runs, the Discount Window, and Deposit Insurance
		Liquidity Risk and Insurance Companies
			Life Insurance Companies
			Property–Casualty Insurance Companies
			Guarantee Programs for Life and Property–Casualty Insurance Companies
		Liquidity Risk and Investment Funds
		Appendix 22A: Statements of Cash Flows, JPMorgan Chase, 2017–2019
		Appendix 22B: New Liquidity Risk Measures Implemented by the Bank for International Settlements
	23: Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet
		Interest Rate and Insolvency Risk Management:  Chapter Overview
		Interest Rate Risk Measurement and Management
			Repricing Gap Model
			Duration Gap Model
		Insolvency Risk Management
			Capital and Insolvency Risk
	24: Managing Risk off the Balance Sheet with Derivative Securities
		Derivative Securities Used to Manage Risk: Chapter Overview
		Forward and Futures Contracts
			Hedging with Forward Contracts
			Hedging with Futures Contracts
		Options
			Basic Features of Options
			Actual Interest Rate Options
			Hedging with Options
			Caps, Floors, and Collars
		Risks Associated with Futures, Forwards, and Options
		Swaps
			Hedging with Interest Rate Swaps
			Hedging with Currency Swaps
			Credit Swaps
			Credit Risk Concerns with Swaps
		Comparison of Hedging Methods
			Writing versus Buying Options
			Futures versus Options Hedging
			Swaps versus Forwards, Futures, and Options
		Appendix 24A: Hedging with Futures Contracts
		Appendix 24B: Hedging with Options
		Appendix 24C: Hedging with Caps, Floors, and Collars
	25: Managing Risk off the Balance Sheet with Loan Sales and Securitization
		Why Financial Institutions Sell and Securitize Loans: Chapter Overview
		Loan Sales
			Types of Loan Sales Contracts
			The Loan Sales Market
			Secondary Market for Less Developed Country Debt
			Factors Encouraging Future Loan Sales Growth
			Factors Deterring Future Loan Sales Growth
		Loan Securitization
			Pass-Through Security
			Collateralized Mortgage Obligation
			Mortgage-Backed Bond
		Securitization of Other Assets
		Can All Assets Be Securitized?
References
Index