Financial markets and institutions 8th global edition by miskin eankins Financial markets and institutions 8th global edition by miskin eankins giáo trình thị trường tài chisnhv à các tổ chức Financial markets and institutions 8th global edition by miskin eankins Financial markets and institutions 8th global edition by miskin eankins Financial markets and institutions 8th global edition by miskin eankins
Financial Markets Institutions and For these Global Editions, the editorial team at Pearson has collaborated with educators across the world to address a wide range of subjects and requirements, equipping students with the best possible learning tools This Global Edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, customization, and adaptation from the North American version Mishkin • Eakins Pearson Global Edition Financial Markets and Institutions eighth edition Frederic S Mishkin • Stanley G Eakins eighth edition This is a special edition of an established title widely used by colleges and universities throughout the world Pearson published this exclusive edition for the benefit of students outside the United States and Canada If you purchased this book within the United States or Canada, you should be aware that it has been imported without the approval of the Publisher or Author Global edition Global edition Global edition www.downloadslide.com Bridging the Gap: Applying Theory to Practice Financial Markets and Institutions’s rich chapter features— including The Practicing Manager, Cases, General Interest Boxes, and Following the Financial News—enable students to both understand and apply core concepts This compelling pedagogy, combined with the authors’ experience as practitioners, rounds out the text’s applied managerial perspective The Practicing Manager CHAPTER Calculating Duration to Measure Interest-Rate Risk CHAPTER Profiting from Interest-Rate Forecasts CHAPTER Using the Term Structure to Forecast Interest Rates CHAPTER Practical Guide to Investing in the Stock Market CHAPTER 10 Using a Fed Watcher CHAPTER 15 Profiting from Foreign Exchange Forecasts CHAPTER 16 Profiting from a Foreign Exchange Crisis CHAPTER 17 Strategies for Managing Bank Capital CHAPTER 19 Profiting from a New Financial Product: A Case Study of Treasury Strips CHAPTER 21 Insurance Management CHAPTER 23 Strategies for Managing Interest-Rate Risk CHAPTER 24 Hedging Interest-Rate Risk with Forward Contracts Hedging with Financial Futures Hedging Foreign Exchange Risk with Forward and Futures Contracts Hedging with Stock Index Futures Hedging with Futures Options Hedging with Interest-Rate Swaps Cases CHAPTER Changes in the Interest Rate Due to Expected Inflation: The Fisher Effect Changes in the Interest Rate Due to a Business Cycle Expansion Explaining Low Japanese Interest Rates CHAPTER The Global Financial Collapse and the Baa Treasury Spread Effects of the Bush Tax Cut and the Obama Tax Increase on Bond Interest Rates Interpreting Yield Curves, 1980–2013 CHAPTER Should Foreign Exchange Rates Follow a Random Walk? What Do the Stock Market Crashes Tell Us About the Efficient Market Hypothesis? CHAPTER Financial Development and Economic Growth Is China a Counter-Example to the Importance of Financial Development? CHAPTER The Mother of All Financial Crises: The Great Depression The Global Financial Crisis of 2007–2009 CHAPTER 10 How the Federal Reserve’s Operating Procedures Limit Fluctuations in the Federal Funds Rate CHAPTER 11 Discounting the Price of Treasury Securities to Pay the Interest CHAPTER 12 The 2007–2009 Financial Crisis and the Bailout of Fannie Mae and Freddie Mac CHAPTER 13 The 2007–2009 Financial Crisis and the Stock Market The September 11 Terrorist Attack, the Enron Scandal, and the Stock Market CHAPTER 14 The Discount Point Decision CHAPTER 15 Effect of Changes in Interest Rates on the Equilibrium Exchange Rate Why Are Exchange Rates So Volatile? The Dollar and Interest Rates The Global Financial Crisis and the Dollar CHAPTER 16 The Foreign Exchange Crisis of September 1992 How Did China Accumulate Over $3 Trillion of International Reserves? CHAPTER 17 How a Capital Crunch Caused a Credit Crunch During the Global Financial Crisis CHAPTER 20 Calculating a Mutual Fund’s Net Asset Value CHAPTER 24 Lessons from the Global Financial Crisis: When Are Financial Derivatives Likely to Be a Worldwide Time Bomb? General Interest Boxes CHAPTER Global: Are U.S Capital Markets Losing Their Edge? Global: The Importance of Financial Intermediaries Relative to Securities Markets: An International Comparison Symbol Page Where Introduced Term iD 405 interest rate on dollar assets F 405 interest rate on foreign assets ir 89 real interest rate Pt 93 price of a security at time t R 93 return i D 406 expected return on dollar deposits RF 406 expected return on foreign deposits ROA 447 return on assets ROE 447 return on equity RSA 611 rate-sensitive assets RSL 611 rate-sensitive liabilities S 112 supply curve R www.downloadslide.com CHAPTER Global: Negative T-Bill Rates? It Can Happen Mini-Case: With TIPS, Real Interest Rates Have Become Observable in the United States Mini-Case: Helping Investors Select Desired Interest-Rate Risk CHAPTER Mini-Case: The Yield Curve as a Forecasting Tool for Inflation and the Business Cycle CHAPTER Mini-Case: An Exception That Proves the Rule: Raj Rajaratnam and Galleon Mini-Case: Should You Hire an Ape as Your Investment Adviser? CHAPTER Mini-Case: The Enron Implosion Mini-Case: Should We Kill All the Lawyers? Mini-Case: The Demise of Arthur Andersen Mini-Case: Credit Rating Agencies and the 2007–2009 Financial Crisis Mini-Case: Has Sarbanes-Oxley Led to a Decline in U.S Capital Markets? CHAPTER Mini-Case: Collateralized Debt Obligations (CDOs) Inside the Fed: Was the Fed to Blame for the Housing Price Bubble? Global: The European Sovereign Debt Crisis CHAPTER Inside the Fed: The Political Genius of the Founders of the Federal Reserve System Inside the Fed: The Special Role of the Federal Reserve Bank of New York Inside the Fed: The Role of the Research Staff Inside the Fed: The FOMC Meeting Inside the Fed: Green, Blue, Teal and Beige: What Do These Colors Mean at the Fed? Inside the Fed: How Bernanke’s Style Differs from Greenspan’s Inside the Fed: The Evolution of the Fed’s Communication Strategy CHAPTER 10 Inside the Fed: A Day at the Trading Desk Inside the Fed: Fed Lending Facilities During the Global Financial Crisis Global: The European Central Bank’s Monetary Policy Strategy Inside the Fed: Ben Bernanke and the Federal Reserve Adoption of Inflation Targeting CHAPTER 11 Mini-Case: Treasury Bill Auctions Go Haywire Global: Ironic Birth of the Eurodollar Market CHAPTER 13 Mini-Case: History of the Dow Jones Industrial Average CHAPTER 14 E-Finance: Borrowers Shop the Web for Mortgages CHAPTER 16 Inside the Fed: A Day at the Federal Reserve Bank of New York’s Foreign Exchange Desk Global: Why the Large U.S Current Account Deficit Worries Economists Mini-Case: Will the Euro Survive? Global: Argentina’s Currency Board Global: Dollarization CHAPTER 17 Conflicts of Interest: Barings, Daiwa, Sumitomo, Société Générale, and J.P Morgan Chase: Rogue Traders and the Principal–Agent Problem A01_MISH0484_08_GE_FM.indd CHAPTER 18 Global: The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing? Global: Where is the Basel Accord Heading After the Global Financial Crisis? Mini-Case: Mark-to-Market Accounting and the Global Financial Crisis Mini-Case: The Global Financial Crisis and Consumer Protection Regulation E-Finance: Electronic Banking: New Challenges for Bank Regulation Global: International Financial Regulation CHAPTER 19 E-Finance: Will “Clicks” Dominate “Bricks” in the Banking Industry? E-Finance: Why Are Scandinavians So Far Ahead of Americans in Using Electronic Payments and Online Banking? E-Finance: Are We Headed for a Cashless Society? Mini-Case: Bruce Bent and the Money Market Mutual Fund Panic of 2008 E-Finance: Information Technology and Bank Consolidation Mini-Case: The Global Financial Crisis and the Demise of Large, Free-Standing Investment Banks CHAPTER 20 Mini-Case: The Long Term Capital Debacle Conflicts of Interest: Many Mutual Funds Are Caught Ignoring Ethical Standards Conflicts of Interest: SEC Survey Reports Mutual Fund Abuses Widespread CHAPTER 21 Mini-Case: Insurance Agent: The Customer’s Ally Conflicts of Interest: The AIG Blowup Conflicts of Interest: The Subprime Financial Crisis and the Monoline Insurers Mini-Case: Power to the Pensions CHAPTER 22 Mini-Case: Example of Using the Limit-Order Book E-Finance: Venture Capitalists Lose Focus with Internet Companies CHAPTER 24 Mini-Case: The Hunt Brothers and the Silver Crash Mini-Case: Program Trading and Portfolio Insurance: Were They to Blame for the Stock Market Crash of 1987? Following the Financial News CHAPTER Foreign Stock Market Indexes CHAPTER Forecasting Interest Rates CHAPTER Yield Curves CHAPTER 15 Foreign Exchange Rates CHAPTER 24 Financial Futures Stock Index Futures 19/02/15 9:14 AM www.downloadslide.com A01_MISH0484_08_GE_FM.indd 19/02/15 9:14 AM www.downloadslide.com Financial Markets and Institutions E i g h t h E d i t i o n G L O B A L E DITION A01_MISH0484_08_GE_FM.indd 2/23/15 3:17 PM www.downloadslide.com The Pearson Series in Finance Bekaert/Hodrick Frasca Berk/DeMarzo Gitman/Zutter International Financial Management Corporate Finance* Corporate Finance: The Core* Berk/DeMarzo/Harford Fundamentals of Corporate Finance* Brooks Financial Management: Core Concepts* Copeland/Weston/Shastri Financial Theory and Corporate Policy Dorfman/Cather Introduction to Risk Management and Insurance Personal Finance Principles of Managerial Finance* Principles of Managerial Finance––Brief Edition* Haugen The Inefficient Stock Market: What Pays Off and Why The New Finance: Overreaction, Complexity, and Uniqueness Holden Excel Modeling in Corporate Finance Excel Modeling in Investments Hughes/MacDonald Eakins/McNally Corporate Finance Online* Eiteman/Stonehill/Moffett Multinational Business Finance Fabozzi Bond Markets: Analysis and Strategies Fabozzi/Modigliani Capital Markets: Institutions and Instruments Fabozzi/Modigliani/Jones Foundations of Financial Markets and Institutions Finkler Financial Management for Public, Health, and Not-for-Profit Organizations Foerster Financial Management: Concepts and Applications* International Banking: Text and Cases Hull Fundamentals of Futures and Options Markets Options, Futures, and Other Derivatives Keown Personal Finance: Turning Money into Wealth* Keown/Martin/Petty Foundations of Finance: The Logic and Practice of Financial Management* Kim/Nofsinger Corporate Governance Madura Personal Finance* Marthinsen Risk Takers: Uses and Abuses of Financial Derivatives McDonald Derivatives Markets Fundamentals of Derivatives Markets Mishkin/Eakins Financial Markets and Institutions Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance Nofsinger Psychology of Investing Pennacchi Theory of Asset Pricing Rejda Principles of Risk Management and Insurance Smart/Gitman/Joehnk Fundamentals of Investing* Solnik/McLeavey Global Investments Titman/Keown/Martin Financial Management: Principles and Applications* Titman/Martin Valuation: The Art and Science of Corporate Investment Decisions Weston/Mitchel/Mulherin Takeovers, Restructuring, and Corporate Governance *denotes MyFinanceLab titles Log onto www.myfinancelab.com to learn more A01_MISH0484_08_GE_FM.indd 19/02/15 9:14 AM www.downloadslide.com Financial Markets and Institutions E i g h t h E d i t i o n G L O B A L E DITION Frederic S Mishkin Graduate School of Business, Columbia University Stanley G Eakins East Carolina University Boston Columbus Indianapolis New York San Francisco Hoboken Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo A01_MISH0484_08_GE_FM.indd 2/23/15 3:17 PM www.downloadslide.com Senior Production Controller, Global Editions: Editor in Chief: Donna Battista Executive Acquisitions Editor: Adrienne D’Ambrosio Acquisitions Editor: Christina Masturzo Editorial Project Manager: Erin McDonagh Editorial Assistant: Elissa Senra-Sargent Senior Acquisitions Editor, Global Editions: Steven Jackson Assistant Project Editor, Global Editions: Suchismita Ukil Executive Marketing Manager: Lori DeShazo Managing Editor: Jeff Holcomb Production Project Manager: Alison Eusden Media Production Manager, Global Editions: M Vikram Kumar Trudy Kimber Operations Specialist: Carol Melville Art Director: Jonathan Boylan Cover Designer: Lumina Datamatics Ltd Cover Art: © Kushch Dmitry/Shutterstock, zhu difeng/Shutterstock, Pete Spiro/Shutterstock, autsawin uttisin/Shutterstock Senior Media Producer: Melissa 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www.pearsonglobaleditions.com The rights of Frederic S Mishkin and Stanley G Eakins to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Financial Markets and Institutions, 8th edition, ISBN 978-0-13-342362-4, by Frederic S Mishkin and Stanley G Eakins, published by Pearson Education © 2015 Copyright © 2016, 2012, 2009 by Frederic S Mishkin All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners ISBN 10: 1-292-06048-4 ISBN 13: 978-1-292-06048-4 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 14 13 12 11 Typeset in ITC Century Std by Cenveo® Publisher Services Printed and bound by Courier/Kendallville in the United States of America A01_MISH0484_08_GE_FM.indd 05/03/15 5:20 PM www.downloadslide.com To My Dad —F S M To My Wife, Laurie —S G E A01_MISH0484_08_GE_FM.indd 19/02/15 9:14 AM www.downloadslide.com A01_MISH0484_08_GE_FM.indd 19/02/15 9:14 AM www.downloadslide.com Index Regulation Q, 75, 305, 480, 501–2, 506–7, 535 Regulation Z, 474 Regulatory agencies, 73t Regulatory arbitrage, 467 Regulatory forbearance, 576 Reinsurance, 562 Reinvestment risk, 95–96, 504 Relative price levels, 387–88 Renminbi (Chinese currency), 425 Repurchase agreements (repos), 303–4 defined, 218, 259, 436 interest rates on, 304 use of, 304 Required reserve ratio, 250, 436 Required reserves, 250, 253, 436 Required returns, 351, 351t Research conflicts of interest, investment banks and, 197–98 online, 51–52 Reserve accounts, 371 Reserve aggregates, 284–85 Reserve Bank of New Zealand, 275 Reserve currency, 417 Reserve Primary Fund, 537 Reserve requirements for banks, 294, 294n, 303, 501 on checkable deposits, 263, 263n defined, 252, 436 of European Central Bank, 270 of Federal Reserve, 231, 241, 252, 263, 303 response to, 256, 257f taxes and, 501 Reserves (bank assets) defined, 436 liquidity management and, 441–44 secondary, 437 Reserves (Federal Reserve deposits) borrowed, 250–51, 254 defined, 250 demand curve for, 252–53, 253f excess, 250, 253 federal funds rate and, 252–57, 285, 285f, 303 interest rates on, 253, 256–57, 257f, 263 market equilibrium for, 252–53, 253f, 254 nonborrowed, 254 required, 250, 253, 436 Reserves market, supply and demand analysis of, 284–85, 284f, 285f Residential mortgages, 362–66 See also Mortgages Residual claimants, 60, 340 Resolution authority, 484 Restrictive covenants, 469 collateral and, 191–92 Z02_MISH0484_08_GE_IDX.indd 19 on corporate bonds, 325–26 debt contracts and, 191–92 defined, 178–79, 325 financial information and, 192 monitoring and enforcement of, 606 Restrictive provisions, insurance companies, 564–65 Retailization, 542 Retirement mutual funds, 529 Return (rate of return), 78, 92–103 See also Rate of return Return on assets (ROA), 446–47, 454–55, 456t, 457 Return on equity (ROE), 447, 455–57, 456t Revaluation, of currencies, 418 Revenue bonds, 323, 324f Reverse annuity mortgages (RAMs), 369, 370t Reverse repo (matched sale-purchase transaction), 260 Reverse transactions, 269–70 Revolving underwriting facilities (RUFs), 450 Riegle-Neal Interstate Banking and Branching Efficiency Act (1994), 465, 478t, 513–14, 516 Riksban of Sweden, 244 Risk See also Credit risk; Default risk; Interest-rate risk asset demand and, 107, 108–10, 111t bond demand curve and, 116t, 117 defined, 66, 107 municipal bonds and, 323–24 prepayment risk, 373 reinvestment risk, 95–96, 504 U.S Treasury bills and, 300–1 Risk-averse individuals, 109, 368, 551 Risk-based insurance premiums, 564 Risk class, 564 Risk management Federal Reserve System and, 470 in financial institutions, 50, 209, 604–24 off-balance-sheet activities and, 450–51 regulation and, 470 Risk preferer or risk lover, 109 Risk premium, 131, 132, 134, 135 Risk sharing, 66 Risk structure of interest rates, 129, 130–37 Risk taking banks and, 507–8 financial crises and, 209, 427–28, 465, 508 lender of last resort and, 429 monetary policy and, 282–83 Risky assets, 66, 74, 110, 117 Robertson Stephens & Co., 582 Rolls-Royce PLC, 520 Roosevelt, Franklin Delano, 211–12 Royal Bank of Canada, 496 Russia, 271, 429 See also Soviet Union I-19 S Sallie Mae (Student Loan Marketing Association), 320–21 Salomon Brothers, 503–4 Salomon Smith Barney, 124, 201, 301, 302, 516, 592 San Francisco Chronicle, 168 Sapir Consolidated Airlines stock, 340f Sarbanes-Oxley Act (2002), 63, 200–1, 202, 471, 478t, 599 Savers, 115 Savings accounts, 435 Savings and loan associations (S&Ls), 69t, 70t, 362 bailouts, 466, 480 crisis of 1980s, 479–80, 479n defined, 70–71 interest rates and, 369, 609 regulation and structure of, 518 Savings deposits, 70, 294f Scam artists, 168, 372 Scandinavians, 497–98 SCAP See Supervisory Capital Assessment Program Scotland, 526 Screening credit risk management and, 605–6 by insurance companies, 564 Sears, 496 Seasonal credit, 261 Seasonal credit facility, 261n Seasoned issues, 583 Secondary credit, 261 Secondary credit facility, 261n Secondary loan participation, 449 Secondary markets, 60–61 in capital market trading, 317 defined, 60, 293, 580 for money market securities, 295, 311–12, 312t organization of, 61 Secondary mortgage markets, 362, 366, 372–73 Secondary reserves, 437 Second Bank of the United States, 226, 491–92 Second mortgages, 365, 369, 370t Secured bonds, 327 Secured debt, 178 Secured loans, 607 Securities See also Mortgage-backed securities; specific securities advertising, 584 advice on, 582–83 as assets, 437 best efforts agreement, 585 default risk of, 437 defined, 44, 58 easy access to, 178 2/20/15 5:18 PM www.downloadslide.com I-20 Index Securities (continued) efficient market hypothesis and, 158–59 financial intermediaries compared to, 66 fully subscribed issue, 585 government securities, 250 hybrid, 504 insider trading and, 74 intrinsic value of, 170 investment-grade, 132 long-term, 311, 316, 319, 370 market setting prices for, 349–50 oversubscribed issue, 585 pricing, 61, 74, 582–83 primary markets for, 60–61, 580 private placement, 585–86 public offering process, 582–86, 586f secondary markets for, 60–61, 580 short-term, 62, 292, 293, 299, 316 state and local government, 437 term security, 305 undersubscribed issue, 585 underwriting, 61 unexploited profit opportunities and, 160–61 Securities Act (1933), 73, 356, 471, 477t, 539, 583, 593 Securities Acts Amendment (1975), 590 Securities and Exchange Commission (SEC), 72, 73t, 503 disclosure requirements and, 471, 539, 546 divisions in, 357 functions of, 73–74, 183, 184, 356–57, 516, 592, 641 investigations by, 199 reforms and, 200 registration with, 305, 583, 593 rules and requirements, 539, 540, 542, 543–46 Sarbanes-Oxley Act and, 201 Securities brokers, 344, 538, 580, 588, 588n Securities dealers, 580, 588, 588n, 591–92 Securities Exchange Act (1934), 356, 477t, 539, 583, 593 Securities firms commercial banks relationship with, 74, 594 regulation of, 592–93 Securities Investor Protection Corporation (SIPC), 590, 593 Securities orders, 589–90 Securities Protection Corporation Act (1970), 593 Securitization, 214, 373, 500, 507 See also Mortgage-backed securities Securitized mortgages, 373, 377 Z02_MISH0484_08_GE_IDX.indd 20 Security First Network Bank, 496 Seed investing, 598 Seigniorage, 422 Self-Employed Individuals Tax Retirement Act (1962), 576 Semiannual bonds, 332–34 Semistrong-form efficiency test, 163n Separate Trading of Registered Interest and Principal Securities (STRIPS), 320, 503–5, 505t September 11 terrorist attack, 352–53, 562 Sequoia Capital, 599 Series I savings bond, 92 Service transactions, 414 Settlement price, 634 Shadow banking system, 218–19, 473, 493 Shareholders, mutual funds, 72, 180, 531, 539–40, 543–45 Shares, 70, 71, 72 Shell operations, 521 Shiller, Robert, 166 Short position, 626, 628 Short sales, 172, 344, 589–90 Short-term debt instruments, 60, 95 Short-term interest rates, 52, 137, 139, 142, 143n, 144, 266–67 Short-term securities, 62, 292, 293, 299, 316 Silver market, 635 Simple interest rate, 79–80, 83 Simple loans, 79, 81, 82–83 Simple present value, 79–80 SIMPLE retirement plans, 576–77 Singapore, 520 Singapore Exchange, 65, 451 Sinking fund, 326 Small Business Protection Act (1996), 576 Small-denomination time deposits, 435 Small-firm effect, 165 Smart card, 498, 499 Smart money, 172 Snake, 417 Social contagion, 172 Social Security, 571–74, 572f, 573f Société Générale, 452 Soros, George, 425 Sources of funds, 69–70, 69t, 434, 445 See also Liabilities South Korea, 356 Sovereign debt crisis, 219, 220 Soviet Union, 196, 310 S&P 542 Index, 65 Spain, 219, 220, 276 Spanish peseta, 424 Special purpose vehicle (SPV), 215 Speculative attacks, on currencies, 422, 424 Speculative bubble, 172 Speculative-grade bonds, 133, 328–29 Spiders, 344 Spinning, 198 Spitzer, Eliot, 201, 546 Spot exchange rate, 383, 384, 389, 406 Spot rates, 151, 636n Spot transactions, 383 Spread, 588 See also Credit spreads SPV See Special purpose vehicle Standard and Poor’s Corporation, 183, 199, 219 bond ratings, 132, 132t, 328, 328t S&P 542 Index, 166, 344, 354, 637–38 Standard deviation, 108–9 Standing lending facility, 261 Staples, 595 Starbucks, 595 State and local government securities, 437 State and national municipal (muni) bonds, 534 State banking and insurance commissions, 73t, 74 State banks, 469, 492 State-owned banks, 195, 196 Sterilized foreign exchange interventions, 412, 413–14, 414n Stern, Edward J., 545 Stewart, Martha, 589 Stock company, 554 Stock funds, 532–34 Stockholders bondholders vs., 325, 335, 340, 341 common, 340 insiders, 74 preferred, 341 principals, 187 rights of, 60, 340–41 Stock index futures contracts, 637–40 Stock market crashes, 45 See also Great Depression of 1929, 73, 211, 526 of 1987 (Black Monday), 45, 171, 429, 589, 638 of 2008, 221 of 2009, 352 efficient market hypothesis and, 171 Tech crash of 2000, 46 Stock market indexes, 353–55 Stock market risk, 637 Stock markets, 339–59 anomalies and, 165, 165n business investment decisions and, 46 defined, 45–46 financial crisis of 2007-2009 and, 352 in financial system, 46 foreign, 64, 65 lemons problem and, 182 overreaction of, 166 2/20/15 5:18 PM www.downloadslide.com Index practical guide to investing in, 167–70 price volatility, 45–46, 46f, 166, 339 regulation of, 356–57 September 11 terrorist attack and, 352–53 Stock options, 327, 640 Stock prices See also Stock valuation advice on, 582–83 computing, 344–48 convertible bonds and, 326–27 efficient market hypothesis and, 162–64, 163n, 166, 167 financial crisis of 2007-2009 and, 218–19, 219f, 352 fluctuations in, 351–52 for foreign stock markets, 64 good news and, 169 during Great Depression, 212–13, 212f January effect and, 165 overvalued, 172 publicly available information on, 162 random walk behavior of, 162–64, 163n required returns and, 351, 351t securities orders and, 589–90 technical analysis and, 163–64 volatility, 45–46, 46f, 166, 339 Stocks See also Common stocks; Initial public offerings of assets, 114 buy and hold strategy for, 170 defined, 45, 59 dividends, 340–41, 346, 351, 356 foreign, 356 hot tips on, 168–69 investing in, 340–44 issued, 335f mean reversion and, 166 preferred vs common, 340–41 sale of, 341–44 Sapir Consolidated Airlines stock, 340f underwriting, 582–86 valuation of, 339 Stock valuation, 344–48 See also Stock prices errors in, 350–53 estimating growth and, 350, 351t estimating risk and, 351 forecasting dividends and, 351 generalized dividend model, 346 Gordon growth model, 346–47, 350, 352–53 market and, 349–50 one-period valuation model, 345 price earnings valuation method, 348 Stop loss order, 344, 589 Stored-value card, 498, 499 Strait Times index, 65 Strategic income bonds, 534 Stress testing, 451, 470 Strike price, 640 Z02_MISH0484_08_GE_IDX.indd 21 STRIPS, 320, 503–5, 505t Strong-form efficiency test, 163n Structural unemployment, 273 Structured credit products, 214, 215 Structured investment vehicles (SIVs), 449 Student Loan Marketing Association (Sallie Mae), 320–21 Subordinated debentures, 327 Subprime mortgage crisis bailout of Fannie Mae and Freddie Mac and, 321–22 financial crisis of 2007-2009 and, 48, 133, 200, 206, 216–18, 308, 321–22, 352, 376, 517 monoline insurance and, 568 Subprime mortgage loans, 375–77, 474 credit-rating agencies and, 376, 568 defined, 214, 375 Federal Reserve System on, 474 Sumitomo Corporation, 452 Sun Microsystems, 595 SuperDOT system (Super Designated Order Turnaround system), 343 Superregional banks, 512 Supervisory Capital Assessment Program (SCAP), 221n Supply, excess, 113 Supply and demand analysis asset market approach, 114, 114n, 389 in bond markets, 110–14, 114n, 159 Bush tax cut, 136–37 forecasting interest rates, 124–25 of foreign exchange rates, 384, 389–91, 417 of reserves market, 284–85, 284f, 285f Supply curve for bonds, 112–13, 112f, 112n, 118–20, 118t, 119f business cycle expansion and, 119, 122–23, 122f defined, 112 for domestic assets, 389–90 expected inflation and, 119 government budget and, 119–20 investment profitability and, 119 shifts in, 114, 118–20, 118t, 119f Supply-side economics, 273 Survivorship benefits, 557 Swap lines, 265 Swaps See also Credit default swaps; Interest-rate swaps credit swaps, 651–52 currency swap, 647 defined, 647 plain vanilla swap, 647 Swaptions, 647 Sweden, 244, 245, 276, 424, 498 Sweep account, 502–3 Switzerland, 245, 486, 517 I-21 Syndicate, 584 Systemically important financial institutions (SIFIs), 484, 485 Systemic financial institutions, 484 Systemic risk regulation, 484 T T-accounts, 251–52, 410, 412, 438–40 Tails, 562 Takedowns, 597 Takeovers, 587 Target financing rate, 269 Tariffs, 388 Taxes Bush tax cut, 136–37 capital gain, 169n debt contracts and, 189n dividends and, 189n, 555 havens, 521 interest rates and, 91n, 134–37, 136f January effect and, 165 municipal bonds and, 134–37, 136f, 322–24 pension plans and, 572, 574 profits after, 454 reserve requirements and, 501 second mortgage deductions, 369 tariffs, 388 Treasury bonds and, 135n Tax Reform Act (1986), 576 Taylor, John, 217 Taylor rule, 217 TCBY, 595 Teal book, 235 Teaser loans, 376 Tech crash of 2000, 46 Technical analysis, stock prices and, 163–64 Tech stock bubble, 209, 280–82 Temporary Guarantee Program, 537 Temporary open market operations, 259–60 Tender offer, 587 Term Asset-Backed Securities Loan Facility (TALF), 265 Term Auction Facility (TAF), 264, 265 Term life insurance, 556–57 Term Securities Lending Facility (TSLF), 265 Term security, 305 Term structure of interest rates, 137–53 defined, 129 evidence on, 147–49 expectations theory and, 138, 139–43, 143n, 145f forecasting interest rates and, 150–53 liquidity premium theory and, 138–39, 144–49, 145f, 148f market segmentation theory and, 138, 143–44 yield curves and, 137–38, 142–49, 148f 2/20/15 5:18 PM www.downloadslide.com I-22 Index Term to expiration, 640, 645 Term to maturity bonds and, 96–97, 129, 137 coupon bond and, 87, 97 duration and, 97–99 Terrorism Risk Insurance Act (2002), 562 Texaco, 571 Theory of bureaucratic behavior, 240–41 Theory of efficient capital markets, 158 See also Efficient market hypothesis Theory of portfolio choice assets and, 110, 389–90, 394 defined, 110 Theory of purchasing power parity (PPP), 385–87, 386f Third World debt crisis, 427–28, 454 Thrift institutions (thrifts), 70 See also Credit Unions; Mutual savings banks; Savings and loan associations deposit insurance in, 518–19 deregulation of, 480 market share of, 505, 506f as mortgage-lending institution, 369–70 regulation and structure of, 518–19 Tightening of monetary policy, 233 Time deposits, 70, 435 Time-inconsistency problem, 271–72 TIPS (Treasury Inflation Protection Securities), 92, 320 Title insurance, 365 Title search, 365 Tokyo Stock Exchange, 632 Tombstones, 584 Too big to fail problem, 262, 464–65, 485–86 Toronto Stock Exchange, 341 Total return funds, 534 Toyota, 509, 575 Trade, international, 519–21 Trade balance, 414 Trade barriers, 388 Trading activities, by banks, 450–52 Trading Activities Manual, 470 Tranches, 215, 375 Transaction costs defined, 65 economies of scale and, 65, 180 financial intermediaries and, 65–66, 179–80 financial structure and, 179 Transparency, 236, 241, 276, 343, 546 Travelers Companies, 353 Travelers Group, 516 Treasury Inflation Protection Securities (TIPS), 92, 320 Treasury Investment Growth Fund (TIGRs), 320 Z02_MISH0484_08_GE_IDX.indd 22 Truth in Lending Act, 471, 474 Twain, Mark, 499 12b-1 fees, 538 Two-handed interventions, 236 Tyco International, 188 U UBS Warburg, 201 Uncertainty, during financial crises, 210 Unconditional commitments, 268–69 Underfunded pension plans, 569 Undersubscribed issue, 585 Undervaluation of yuan, 425 Underwater mortgages, 218 Underwriters global debt and equity issues, 584t insurance, 553–54 Underwriting, 584–85 defined, 61 investment banks and, 197–98, 582–86 mortgage-backed securities, 215 stocks and bonds, 582–86 Unemployment, 272–73, 274, 275 Unexploited profit opportunities, 160–61, 171–72 Unilateral transfers, 414–15 Uninsured mortgages, 373 United Health Group, 353 United Kingdom, 219, 244, 276 banking industry in, 509, 514 foreign exchange crisis and, 423–25 purchasing power parity and, 386, 386f universal banking in, 517 United States (U.S.) banking overseas, 520–21 capital markets, 63, 202 claims on foreign wealth, 415, 415n debt default, 301 foreign banks in, 521–22 funding of national debt, 295–96, 298, 316, 317 Universal banking, 517 Universal life insurance, 557–58 Unsecured bonds, 327 Unsecured debt, 178 Unsterilized foreign exchange interventions, 412–13, 412n, 413f U.S Congress budget negotiations, 131 Federal Reserve System and, 226–27, 237–41 lobbying in, 321 U.S Department of Agriculture, 632 U.S Department of Labor, 575, 597 U.S dollar See also Eurodollars; Foreign exchange rates break the buck, 308 deposits denominated in dollars, 384 euro and, 47, 405–7, 406n exchange rates, 47–48, 47f, 274, 381, 421 financial crisis of 2007-2009 and, 400 gold and, 417 interest rates and, 398–400, 399f international bond market and, 62–63 as reserve currency, 417 yuan and, 425–26 Used-car market, 181–82, 184–85 Uses of funds, 69t, 70, 124, 436, 439 See also Assets U.S Flow of Funds report, 77 U.S government and agency securities, 437 U.S government bonds over-the-counter trading of, 61–62 yield curves for, 150f U.S Supreme Court, 515, 574 U.S Treasury Exchange Stabilization Fund, 411 Federal Reserve System and, 239, 259 foreign exchange interventions by, 411 liabilities of, 249, 249n long-term rates, 363f as money market participant, 297 regulation reforms and, 480, 481, 493 requirements of, 221n role of, 220, 463, 567 Series I savings bond, 92 STRIPS, 320, 503–5, 505t Temporary Guarantee Program, 537 TIPS, 92, 320 U.S Treasury bills (T-bills), 298–302 auctions, 299–302, 299t interest rates on, 44–45, 89, 90, 91f, 121f, 122, 123f, 294f, 301, 302f, 303, 304f, 319, 319f, 494 issues of, 297, 298–99 liquidity of, 110 national debt funded with, 295–96, 298 risk and, 300–1 U.S Treasury bonds, 317–21 credit spreads, 213f default-free, 130–32, 133 default risk and, 130–33, 318, 318n defined, 44n forward contracts, 626–27 futures contracts, 628–30, 633–34, 641–44, 643f interest rates on, 92, 134–37, 136f, 318–20, 319f liquidity of, 134 purchase of, 239, 239n taxes and, 135n U.S Treasury notes, 317–18 U.S Treasury securities See also U.S Treasury bills; U.S Treasury bonds; U.S Treasury notes discounting, 299–300 involvement in, 229, 266, 400 maturity differences among, 317, 318t yield curves for, 137, 138 2/20/15 5:18 PM www.downloadslide.com Index V Value-at-risk (VaR) calculations, 451, 470 Value Line, 183 Value Line Survey, 165n Vanguard ETFs, 344 Vanguard Group, 96, 538 Vanguard S&P 542 index fund, 531, 537 Variable-rate bonds, 327 Variable-rate mortgages, 494, 609–10 Vault cash, 250, 436 Venture capital firms, 594–98 asymmetric information and, 595–96 functions of, 189, 580 industry description, 594–95 investments, 595t, 598, 599 operation of, 597–98 origins of, 596–97 profitability of, 598 structure of, 597 Vesting, 574 Veterans Administration (VA), 320, 367 Vipers, 344 Virtual bank, 496–97 Visa, 496 Volcker, Paul A., 234, 238n, 485 Volcker Rule, 485, 486 Voting rights, of stockholders, 60, 340–41 W Wall Street Journal, 537 Dow Jones Industrial Average and, 353 financial futures contracts in, 632 Z02_MISH0484_08_GE_IDX.indd 23 on forecasting foreign exchange rates, 401 on forecasting interest rates, 125 “Heard on the Street,” 167 “Investment Dartboard,” 161, 168 Morgan Stanley memo in, 198 on yield curves for Treasury securities, 137 Wall Street Week, 345 Warehousing funds, 295, 316 Washington Public Power Supply System, 323 Weak-form efficiency test, 163n Wealth asset demand and, 107, 107n, 111t bond demand curve and, 115, 116t U.S claims on foreign, 415, 415n Web See Internet Webvan, 599 Welch, Jack, 600 Wells Fargo, 297, 497 Wharton Econometric Forecasting Associates, 125 Whole life insurance, 550, 557 Wholesale markets, 293 Wingspan, 497 Wolfe, Tom, 581 World Bank, 416–17, 421, 463 WorldCom, 184, 199 World equity funds, 534 I-23 World Trade Organization (WTO), 417 Writer, 640 Y Yen (Japanese currency), 385, 386, 401, 520n Yield curves defined, 137 fluctuation of, 619 forecasting inflation and business cycle with, 149 interpreting, 149–50 inverted, 137, 142–43 shapes of, 137 term structure of interest rates and, 137–38, 142–49, 148f for U.S government bonds, 150f for U.S Treasury securities, 137, 138 Yield to maturity, 78, 82–88 bond prices and, 88 coupon bonds, 84–87, 85t defined, 82, 333t discount bonds, 87–88 fixed-payment loan, 83–84 simple loans, 82–83 Yuan (Chinese currency), 382, 425–26 Z Zero-coupon bonds See Discount bonds Zero-lower-bound problem, 264 2/20/15 5:18 PM www.downloadslide.com Z02_MISH0484_08_GE_IDX.indd 24 27/02/15 2:58 PM www.downloadslide.com Guide to Commonly Used Symbols Symbol Page Where Introduced Δ 101 Term change in a variable π 89 expected inflation σ 108 standard deviation Bd 113 demand for bonds Bs 113 supply of bonds C 85 D 110 e DUR 99 yearly coupon payment demand curve duration DURGAP 614 duration gap E 388 exchange (spot) rate (E et+1 − Et)/Et 406 expected appreciation of domestic currency EM 447 equity multiplier GAP 610 income gap i Z02_MISH0484_08_GE_IDX.indd 28 79 interest rate (yield to maturity) 27/02/15 2:58 PM www.downloadslide.com Z02_MISH0484_08_GE_IDX.indd 25 27/02/15 2:58 PM www.downloadslide.com Guide to Commonly Used Symbols Symbol Δ Page Where Introduced Term 59 change in a variable π 47 expected inflation σ 66 standard deviation B d 71 demand for bonds Bs 71 supply of bonds C 43 yearly coupon payment D 68 demand curve e DUR 57 duration DURGAP 572 duration gap E 346 exchange (spot) rate (E et+1 − Et)/Et 364 expected appreciation of domestic currency EM 405 equity multiplier GAP 568 income gap i M38_MISH0484_08_GE_ES2.indd 37 interest rate (yield to maturity) 09/05/15 1:54 PM www.downloadslide.com Z02_MISH0484_08_GE_IDX.indd 26 27/02/15 2:58 PM www.downloadslide.com Symbol Page Where Introduced Term iD 363 interest rate on dollar assets iF 363 interest rate on foreign assets ir 47 real interest rate Pt 51 price of a security at time t R 51 return RD 364 expected return on dollar deposits R F 364 expected return on foreign deposits ROA 405 return on assets ROE 405 return on equity RSA 569 rate-sensitive assets RSL 569 rate-sensitive liabilities S M38_MISH0484_08_GE_ES2.indd 70 supply curve 09/05/15 1:54 PM www.downloadslide.com Z02_MISH0484_08_GE_IDX.indd 27 27/02/15 2:58 PM www.downloadslide.com Bridging the Gap: Applying Theory to Practice Financial Markets and Institutions’s rich chapter features— including The Practicing Manager, Cases, General Interest Boxes, and Following the Financial News—enable students to both understand and apply core concepts This compelling pedagogy, combined with the authors’ experience as practitioners, rounds out the text’s applied managerial perspective The Practicing Manager CHAPTER Calculating Duration to Measure Interest-Rate Risk CHAPTER Profiting from Interest-Rate Forecasts CHAPTER Using the Term Structure to Forecast Interest Rates CHAPTER Practical Guide to Investing in the Stock Market CHAPTER 10 Using a Fed Watcher CHAPTER 15 Profiting from Foreign Exchange Forecasts CHAPTER 16 Profiting from a Foreign Exchange Crisis CHAPTER 17 Strategies for Managing Bank Capital CHAPTER 19 Profiting from a New Financial Product: A Case Study of Treasury Strips CHAPTER 21 Insurance Management CHAPTER 23 Strategies for Managing Interest-Rate Risk CHAPTER 24 Hedging Interest-Rate Risk with Forward Contracts Hedging with Financial Futures Hedging Foreign Exchange Risk with Forward and Futures Contracts Hedging with Stock Index Futures Hedging with Futures Options Hedging with Interest-Rate Swaps Cases CHAPTER Changes in the Interest Rate Due to Expected Inflation: The Fisher Effect Changes in the Interest Rate Due to a Business Cycle Expansion Explaining Low Japanese Interest Rates CHAPTER The Global Financial Collapse and the Baa Treasury Spread Effects of the Bush Tax Cut and the Obama Tax Increase on Bond Interest Rates Interpreting Yield Curves, 1980–2013 CHAPTER Should Foreign Exchange Rates Follow a Random Walk? What Do the Stock Market Crashes Tell Us About the Efficient Market Hypothesis? CHAPTER Financial Development and Economic Growth Is China a Counter-Example to the Importance of Financial Development? CHAPTER The Mother of All Financial Crises: The Great Depression The Global Financial Crisis of 2007–2009 CHAPTER 10 How the Federal Reserve’s Operating Procedures Limit Fluctuations in the Federal Funds Rate CHAPTER 11 Discounting the Price of Treasury Securities to Pay the Interest CHAPTER 12 The 2007–2009 Financial Crisis and the Bailout of Fannie Mae and Freddie Mac CHAPTER 13 The 2007–2009 Financial Crisis and the Stock Market The September 11 Terrorist Attack, the Enron Scandal, and the Stock Market CHAPTER 14 The Discount Point Decision CHAPTER 15 Effect of Changes in Interest Rates on the Equilibrium Exchange Rate Why Are Exchange Rates So Volatile? The Dollar and Interest Rates The Global Financial Crisis and the Dollar CHAPTER 16 The Foreign Exchange Crisis of September 1992 How Did China Accumulate Over $3 Trillion of International Reserves? CHAPTER 17 How a Capital Crunch Caused a Credit Crunch During the Global Financial Crisis CHAPTER 20 Calculating a Mutual Fund’s Net Asset Value CHAPTER 24 Lessons from the Global Financial Crisis: When Are Financial Derivatives Likely to Be a Worldwide Time Bomb? General Interest Boxes CHAPTER Global: Are U.S Capital Markets Losing Their Edge? Global: The Importance of Financial Intermediaries Relative to Securities Markets: An International Comparison Symbol Page Where Introduced Term iD 405 interest rate on dollar assets F 405 interest rate on foreign assets ir 89 real interest rate Pt 93 price of a security at time t R 93 return i D 406 expected return on dollar deposits RF 406 expected return on foreign deposits ROA 447 return on assets ROE 447 return on equity RSA 611 rate-sensitive assets RSL 611 rate-sensitive liabilities S 112 supply curve R www.downloadslide.com M38_MISH0484_08_GE_ES2.indd 09/05/15 1:54 PM www.downloadslide.com M38_MISH0484_08_GE_ES2.indd 09/05/15 1:54 PM ... the Financial System Preview Function of Financial Markets Structure of Financial Markets Debt and Equity Markets Primary and Secondary Markets Exchanges and Over-the-Counter Markets Money and. .. Fundamentals of Financial Institutions Why Study Financial Markets and Institutions? Overview of the Financial System Why Do Financial Institutions Exist? Why Do Financial Crises Occur and Why Are... Bond Markets: Analysis and Strategies Fabozzi/Modigliani Capital Markets: Institutions and Instruments Fabozzi/Modigliani/Jones Foundations of Financial Markets and Institutions Finkler Financial