Contents in Detail Contents on the Web Preface About the Authors

Transcription

1 nn PART ONE 1 2 PART TWO Contents in Detail Contents on the Web Preface About the Authors INTRODUCTION Why Study Financial Markets and Institutions? Overview of the Financial System FUNDAMENTALS OF FINANCIAL MARKETS What Do Interest Rates Mean and What Is Their Role in Valuation? Why Do Interest Rates Change? How Do Risk and Term Structure Affect Interest Rates? Are Financial Markets Efficient? PART THREE 7 8 PART FOUR 9 10 PART FIVE PART SIX FUNDAMENTALS OF FINANCIAL INSTITUTIONS 174 Why Do Financial Institutions Exist? 174 Why Do Financial Crises Occur and Why Are They So Damaging to the Economy? 203 CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY 231 Central Banks: A Global Perspective Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics FINANCIAL MARKETS The Money Markets The Bond Market The Stock Market The Mortgage Markets The Foreign Exchange Market The International Financial System THE FINANCIAL INSTITUTIONS INDUSTRY Banking and the Management of Financial Institutions Financial Regulation Banking Industry: Structure and Competition The Mutual Fund Industry Insurance Companies and Pension Funds Investment Banks, Security Brokers and Dealers, and Venture Capital Firms Mishkin, Frederic S. Financial markets and institutions 2012 digitalisiert durch: IDS Basel Bern

2 Contents in Brief PART SEVEN THE MANAGEMENT OF FINANCIAL INSTITUTIONS Risk Management in Financial Institutions Hedging with Financial Derivatives 630 Glossary G-l CHAPTERS ON THE WEB Index Savings Associations and Credit Unions 26 Finance Companies

3 PART ONE Contents m the Web 27 Preface 29 About the Author» 39 INTRODUCTION Chapter 1 Why Study Financial Markets and Institutions? 41 Preview 41 Why Study Financial Markets? 42 Debt Markets and Interest Rates 42 The Stock Market 43 The Foreign Exchange Market 44 Why Study Financial Institutions? 46 Structure of the Financial System 46 Financial Crises 46 Central Banks and the Conduct of Monetary Policy 46 The International Financial System 47 Banks and Other Financial Institutions 47 Financial Innovation 47 Managing Risk in Financial Institutions 47 Applied Managerial Perspective 48 How We Will Study Financial Markets and Institutions 48 Exploring the Web 49 CoUecting and Graphing Data 49 Web Exercise 50 Concluding Remarks 52 Sommary 52 K«yTerms 53 GM«*!*««* 53 Quantitative Profotem* 54 Wefe &wäm$ 54 Chapter 2 Overview of the Financial System 55 Preview 55 Function of Financial Markets 56 Structure of Financial Markets 58 Debt and Equity Markets 58 Primary and Secondary Markets 58 Exchanges and Over-the-Counter Markets 59 Money and Capital Markets 60 9

4 Contents in Detail Intemationalization of Financial Markets 60 International Bond Market, Eurobonds, and Eurocurrendes 60 GLOBAL Are U.S. Capital Markets Losing Their Edge? 61 World Stock Markets 62 Function of Financial Intermediaries: Indirect Finance 62 Transaction Costs 62 FOLLOWING THE FINANCIAL NEWS Foreign Stock Market Indexes 63 GLOBAL The Importance of Financial Intermediaries Relative to Securities Markets: An International Comparison 64 Risk Sharing 65 Asymmetrie Information: Adverse Selection and Moral Hazard 65 Types of Financial Intermediaries 67 Depository Institutions 68 Contractual Savings Institutions 69 Investment Intermediaries 69 Regulation of the Financial System 70 Increasing Information Available to Investors 70 Ensuring the Soundness of Financial Intermediaries 72 Financial Regulation Abroad 73 Summary 73 Key Terms 74 Questions 74 Web Exercises 75 PART TWO Chapter 3 FUNDAMENTALS OF FINANCIAL MARKETS What Do Interest Rates Mean and What Is Their Role in Valuation? 76 Preview 76 Measuring Interest Rates 77 Present Value TT Four Types of Credit Market Instruments 79 Yield to Maturity 80 GLOBAL Negative T-Bill Rates? It Can Happen 87 The Distinction Between Real and Nominal Interest Rates 88 The Distinction Between Interest Rates and Returns 90 MINI-CASE With TIPS, Real Interest Rates Have Become Observable in the United States 91 Maturity and the Volatility ofbond Returns: Interest-Rate Risk 93 Reinvestment Risk 94 MINI-CASE Helping Investors Select Desired Interest-Rate Risk 94 Summary 95 THE PRACTiaNG MANAGER Calculating Duration to Measure Interest-Rate Risk 95 Calculating Duration 96 Duration and Interest-Rate Risk 100 Summary 101 Key Terms 102 Questions 102

5 Contents in Detail 11 Quantitative Problems 102 Web Exercises 103 Chapter 4 Why Do Interest Rates Change? 104 Preview 104 Determinantsof Asset Demand 104 Wealth 105 Expected Returns 105 Risk 106 Liquidity 107 Summary 108 Supply and Demand in the Bond Market 108 Demand Curve 109 Supply Curve 109 Market Equüibrium HO Supply-and-Demand Analysis 111 Changes in Equilibriurn Interest Rates 112 Shifts in the Demand for Bonds 112 Shifts in the Supply of Bonds 115 CASE Changes in the Interest Rate Due to Expected Inflation: The Fisher Effect 118 CASE Changes in the Interest Rate Due to a Business Cycle Expansion 119 CASE Explaining Low Japanese Interest Rates 121 CASE Reading the Wall Street Journal "Credit Markets" Column 122 FOLLOWING THE FINANCIAL NEWS The "Credit Markets" Column 123 THE PRACTiaNG MANAGER Profiting from Interest-Rate Forecasts 124 FOLLOWING THE FINANCIAL NEWS Forecasting Interest Rates 125 Summary 125 Key Terms 126 Questions 126 Quantitative Problems 127 Web Exercises 127 Web Appendices 128 Chapter 5 How Do Risk and Term Structure Affect Interest Rates? 129 Preview 129 Risk Structure of Interest Rates 129 Default Risk 130 CASE The Subprime Collapse and the Baa-Treasury Spread 133 Liquidity 133 Income Tbx Considerations 134 Summary 135 CASE Effects of the Bush Tax Cut and Its Possible Repeal on Bond Interest Rates 136 Term Stracture of Interest Rates 136 FOLLOWING THE FINANCIAL NEWS Yield Curves 137 Expectations Theory 138 Marktsegmentation theory 142 Liquidity Premium Theory 143

6 Contents in Detail Evidence on the Term Structure 146 Summary 147 MM-CASE The Yield Curve as a Forecasting Tool for Inflation and the Business Cycle 148 CASE Interpreting Yield Curves, THE PRACTiaNG MANAGER Using the Term Structure to Forecast Interest Rates 150 Summaiy 152 Key Terms 153 Questions 153 Quantitative Problems 154 WebExerdses 155 Chapter 6 Are Financial Markets Efficient? 156 Preview 156 The Efficient Market Hypothesis 157 Rationale Behind the Hypothesis 159 Strenger Version of the Efficient Market Hypothesis 160 Evidence on the Efficient Market Hypothesis 160 Evidence in Favor of Market Efficiency 160 MWi CASE An Exception That Proves the Rule: Ivan Boesky 162 CASE Should Foreign Exchange Rates Follow a Random Walk? 164 Evidence Against Market Efficiency 164 Overview of the Evidence on the Efficient Market Hypothesis 166 THE PRACTiaNG MANAGER Practical Guide to Investing in the Stock Market 167 How Valuable Are Published Reports by Investment Advisers? 167 MM-CASE Should You Hire an Ape as Your Investment Adviser? 167 Should You Be Skeptical ofhot Tips? 168 Do Stock Prices Always Rise When There Is Good News? 168 Efficient Markets Prescriptionfor the Investor 169 CASE What Do the Black Monday Crash of 1987 and the Tech Crash of 2000 Teil Us About the Efficient Market Hypothesis? 170 Behavioral Flnance 171 Summary 172 Key Terms 172 Questions 172 Quantität»«Psobfams 173 WebExerdses 173 PART THREE FUNDAMENTALS OF FINANCIAL INSTITUTIONS Chapter 7 Why Do Financial Institutions Exist? 174 Preview 174 Basic Facts About Financial Structure Throughout the World 174 Transaction Costs 178 How Transaction Costs Influenae Financial Structure 178 How Financial Intermediaries Reduce Transaction Costs 178 Asymmetrie Information: Adverse Selection and Mond Hazard 179

7 Contents in Detail 13 The Lemons Problem: How Adverse Selection Influences Financial Structure 180 Lemons in the Stock and Bond Markets 180 Tools to Help Solve Adverse Selection Problems 181 MINI-CASE The Enron Implosion 183 How Moral Hazard Affects the Choice Between Debt and Equity Contracts 185 Moral Hazard in Equity Contracts: The Principal-Agent Problem 185 Tools to Help Solve the Principal-Agent Problem 186 How Moral Hazard Influences Financial Structure in Debt Markets 188 7bois to Help Solve Moral Hazard in Debt Contracts 189 Summary 191 CASE Financial Development and Economic Growth 192 MM-CASE Should We Kill All the Lawyers? 193 CASE Is China a Counter-Example to the Importance of Financial Development? 194 Confliets of Interest 194 What Are Confliets of Interest and Why Do We Care? 195 Why Do Confliets of Interest Arise? 195 The Demise of Arthur Andersen 197 Credit Rating Agencies and the Financial Crisis 198 What Has Been Dane to Remedy Confliets of Interest? 198 MM CASE Has Sarbanes-Oxley Led to a Decline in U.S. Capital Markets? 200 Summary 200 Key Terms 201 Questions 201 Quantitative Problems 202 Web Exercises 202 Chapter 8 Why Do Financial Crises Occur and Why Are They So Damaging to the Economy? 203 Preview 203 Asymmetrie Information and Financial Crises 204 Agency Theory and the Definition ofa Financial Crisis 204 Dynamics of Financial Crises in Advanced Economies 204 Stage One: Initiation of Financial Crisis 204 Stage Two: Banking Crisis 207 Stage Three: Debt Deflation 208 CASE The Mother of All Financial Crises: The Great Depression 209 CASE The Financial Crisis 211 Causes of the Financial Crisis 211 Effects ofthe Financial Crisis 212 M5DE THE FEO Was the Fed to Blame for the Housing Price Bubble? 214 GLOBAL Ireland and the Financial Crisis 217 Height ofthe Financial Crisis and the Decline of Aggregate Demand 218 Dynamics of Financial Crises in Emerging Market Economies 218 Stage One: Initiation of Financial Crisis 218 Stage Two: Currency Crisis 221 Stage Three: FuU-Fledged Financial Crisis 222

8 Contents in Detail CASE Financial Crises in Mexico, ; East Asia, ; and Argentina, GLOBAL The Perversion of the Financial Liberalization/Globalization Process: Chaebols and the South Korean Crisis 225 Summary 228 Key Terms 229 Questions 229 Web Exercises 230 Web References 230 PART FOUR CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY Chapter 9 Central Banks: A Global Perspective 231 Preview 231 Origins of the Federal Reserve System 232 Structure of the Federal Reserve System 232 Federal Reserve Banks 232 Member Banks 234 Board of Governors of the Federal Reserve System 234 Federal Open Market Committee (FOMC) 235 INSIDE THE FED How Bemanke's Style Differs from Greenspan's 236 How Independent Is the Fed? 236 Structure and Independence of the European Central Bank 237 Governing Council Executive Board and General Council 238 How Do National Central Banks Operate Within the Eurosystem? 241 Deutsche Bundesbank 241 How does the ECB differfrom the Bundesbank? 242 How Independent Is the ECB? 242 Central Banks Around the World 243 Bank ofcanada 243 Bank of England 243 Bank of Japan 244 Central Banks in Transition Economies 244 Central Banks in Developing Countries and Emerging Economies 245 People's Bank of China 246 GLOBAL Will the Monetary Union of the Six-Nation Arab Gulf Cooperation Council be Achieved? 246 Multinational Central Banks in Developing Countries 247 Central Bank Reforms in South America 248 Currency Unions in Developing Nations 248 The Trend Tbward Greater Independence 248 Explaining Central Bank Behavior 249 Should the Central Banks Be Independent? 249 The Gase for Independence 249 The Case Against Independence 250 Central Bank Independence and Macroeconomic Performance Throughout the World 251

9 Contents in Detail 15 Summary 252 Key Terms 253 Questions and Prob lems 253 Chapter 10 Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics 254 Preview 254 The Federal Reserve's Balance Sheet 254 Liabilities 255 Assets 256 Open Market Operations 256 Discount Lending 257 The Market for Reserves and the Federal Funds Rate 257 Demand and Supply in the Market for Reserves 258 How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate 259 INSIDE THE FED Why Does the Fed Need to Pay Interest on Reserves? 260 CASE How the Federal Reserve's Operating Procedures Limit Fluctuations in the Federal Funds Rate 263 Tools of Monetary Policy 264 Open Market Operations 264 A Day at the Trading Desk 265 Discount Policy 266 Operation ofthe Discount Window 266 Lender oflast Resort 267 Reserve Requirements 268 INSIDE THE FED Federal Reserve Lender-of-Last-Resort Facilities During the Financial Crisis 269 Monetary Policy Tools of the European Central Bank 270 Open Market Operations 271 Lending to Banks 271 Reserve Requirements 271 The Price Stability Goal and the Nominal Anchor 272 The Role ofa Nominal Anchor 272 The Time-Inconsistency Problem 272 Other Goals of Monetary Policy 273 High Employment 273 Economic Growth 274 Stability of Financial Markets 274 Interest-Rate Stability 274 Stability in Foreign Exchange Markets 275 Should Price Stability Be the Primary Goal of Monetary Policy? 275 Hierarchical vs. Dual Mandates 275 Price Stability as the Primary, Leng-Run Goal of Monetary Policy 276 Inflation Targeting 277 Inflation Targeting im New Zealand, Canada, and the United Kingdom 277 Advantages of Inflation Targeting 278

10 Contents in Detail GLOBAL The European Central Bank's Monetary Policy Strategy 280 Disadvantages of Inflation Targeting 280 INSIDE THE FED Chairman Bernanke and Inflation Targeting 282 Central Banks' Response to Asset-Price Bubbles: Lessons from the Financial Crisis 283 Two Types of Asset-Price Bubbles 283 Should Central Banks Respond to Bubbles? 284 Should Monetary Policy Try to Prick Asset-Price Bubbles? 284 Are Other Types of Policy Responses Appropriate? 285 Tactics: Choosing the Policy Instrument 286 Criteriafor Choosing the Policy Instrument 288 THE PRACTiaNG MANAGER Using a Fed Watcher 289 Summary 290 Key Terms 291 Questions 291 Quantitative Problems 292 Web Exercises 292 Web Appendices 293 PARTFIVE FINANCIAL MARKETS Chapter 11 The Money Markets 294 Preview 294 The Money Markets Defined 295 Why Do We Need the Money Markets? 295 Money Market Cost Advantages 296 The Purpose of the Money Markets 297 Who Participates in the Money Markets? 298 U.S. Treasury Department 298 Federal Reserve System 298 Commercial Banks 298 Businesses 299 Investment and Securities Firms 300 Individuais 300 Money Market Instruments 300 Treasury Bills 301 CASE Discounting the Price of Treasury Securities to Pay the Interest 301 MINt-CASE Treasury Bill Auctions Go Haywire 304 Federal Funds 304 Repurchase Agreements 306 Negotiable Certificates of Deposit 307 Commercial Paper 308 Banker's Acceptances 311 Eurodollars 311 GLOBAL Ironie Birth of the Eurodollar Market 312 Comparing Money Market Securities 313 Interest Rates 313

11 Contents in Detail 17 Liquidity 314 How Money Market Securities Are Valued 314 FOLLOWING THE FINANCIAL NEWS Money Market Rates 314 Summary 316 Key Terms 317 Questions 317 Quantitative Problems 317 Web Exercises 318 Chapter 12 The Bond Market 319 Preview 319 Purpose of the Capital Market 319 Capital Market Participants 320 Capital Market Trading 320 Types of Bonds 321 Treasury Notes and Bonds 322 Treasury Bond Interest Rates 322 Treasury Inflation-Protected Securities (TIPS) 322 Treasury STRIPS 323 Agency Bonds 324 CASE The Financial Crisis and the Bailout of Fannie Mae and Freddie Mac 324 Municipal Bonds 326 Risk in the Municipal Bond Market 328 Corporate Bonds 328 Characteristics of Corporate Bonds 329 Types of Corporate Bonds 330 Financial Guarantees for Bonds 333 Current Yield Calculation 334 Current Yield 334 Finding the Value of Coupon Bonds 335 Finding the Price ofsemiannual Bonds 336 bivesting in Bonds 338 Summary 339 Key Terms 340 Questions 340 Quantitative Problems 340 Web Exercises 341 Chapter 13 The Stock Market 342 Preview 342 hwesting in Stocks 342 Common Stock vs. Preferred Stock 34-3 How Stocks Are Sold 344 Computing the Price of Common Stock 347 The One-Period Valuation Model 348 The GeneraMzed Dividend Valuation Model 349

12 Contents in Detail The Gordon Growth Model 349 Price Earnings Valuation Method 351 How the Market Sets Security Prices 351 Errors in Valuation 353 Problems with Estimating Growth 353 Problems with Estimating Risk 354 Problems with Forecasting Dividends 354 CASE The Financial Crisis and the Stock Market 354 CASE The September 11 Terrorist Attack, the Enron Scandal, and the Stock Market 355 Stock Market Indexes 356 MINI-CASE History of the Dow Jones Industrial Average 358 Buying Foreign Stocks 358 Regulation of the Stock Market 359 The Securities and Exchange Commission 359 Summary 360 Key Terms 360 Questions 361 Quantitative Problems 361 Web Exercises 362 Chapter 14 The Mortgage Markets 363 Preview 363 What Are Mortgages? 364 Characteristics of the Residential Mortgage 365 Mortgage Interest Rates 365 CASE The Discount Point Decision 366 Loan Terms 367 Mortgage Loan Amortization 369 Types of Mortgage Loans 370 Insured and Conventional Mortgages 370 Fixed- and Adjustable-Rate Mortgages 370 Other Types of Mortgages 371 Mortgage-Lending Institutions 373 Loan Servicing 374 E-FINANCE Borrowers Shop the Web for Mortgages 375 Secondary Mortgage Market 375 Securitization of Mortgages 376 What Is a Mortgage-Backed Security? 376 Types of Pass-Through Securities 377 Subprime Mortgages and CDOs 378 The Real Estate Bubble 379 Summary 380 Key Terms 380 Questions 381 Quantitative Problems 381 Web Exercises 383

13 Contents in Detail 19 Chapter 15 The Foreign Exchange Market 384 Preview 384 Foreign Exchange Market 385 What Are Foreign Exchange Rates? 386 Why Are Exchange Rates Important? 386 FOLLOWING THE FINANCIAL NEWS Foreign Exchange Rates 387 How Is Foreign Exchange Traded? 388 Exchange Rates in the Long Run 388 Law qfone Price 388 Theory ofpurchasing Power Parity 389 Why the Theory ofpurchasing Power Parity Cannot Fully Explain Exchange Rates 390 Factors That Affect Exchange Rates in the Long Run 391 Exchange Rates in the Short Run: A Supply and Demand Analysis 392 Supply Curve for Domestic Assets 393 Demand Curve for Domestic Assets 393 Equilibriurn, in the Foreign Exchange Market 394 Explaming Changes in Exchange Rates 395 Shifts in the Demand for Domestic Assets 395 Recap: Factors That Change the Exchange Rate 398 CASE Effect of Changes in Interest Rates on the Equilibriurn Exchange Rate 400 CASE Why Do Some Nations Peg Their Currencies? 402 CASE The Euro Foreign Exchange Rate and Oil Prices 402 CASE The Global Financial Crisis and the Euro 404 CASE Reading the Wall Street Journal: The "Currency Trading" Column 405 FOLLOWING THE FINANCIAL NEWS The "Currency Trading" Column 406 THE PRACTICING MANAGER Profiting from Foreign Exchange Forecasts 406 Summary 407 Key Terms 408 Questions 408 Quantitative Problems 408 Web Exercises 409 Chapter 15 Appendix The Interest Parity Condition 410 Comparing Expected Returns on Domestic and Foreign Assets 410 Interest Parity Condition 412 Chapter 16 The International Financial System 414 Preview 414 Intervention in the Foreign Exchange Market 414 Foreign Exchange Intervention and the Money Supply 414 INSIDE THE FED A Day at the Federal Reserve Bank of New York's Foreign Exchange Desk 416 Unsterüized Intervention 417 Sterüized Intervention 417 Balance of Payments 419 GLOBAL Why the Large U.S. Current Account Deficit Worries Economists 420

14 Contents in Detail Exchange Rate Regimes in the International Financial System 420 Fixed Exchange Rate Regimes 421 How a Fixed Exchange Rate Regime Works 421 GLOBAL The Euro's Challenge to the Dollar 423 GLOBAL Argentina's Currency Board 424 GLOBAL Dollarization 425 CASE The Foreign Exchange Crisis of September THE PRACTiaNG MANAGER Profiting from a Foreign Exchange Crisis 427 CASE Recent Foreign Exchange Crises in Emerging Market Countries: Mexico 1994, East Asia 1997, Brazil 1999, and Argentina CASE How Did China Accumulate Over $2 Trillion of International Reserves? 429 Managed Float 430 Capital Controls 431 Controls on Capital Outflows 431 Controls on Capital Inflows 431 The Role of the IMF 432 Should the IMF Be an International Lender oflast Resort? 432 How Should the IMF Operate? 433 Summary 435 Key Terms 435 Questions 436 Quantitative Problems 436 Web Exercises 437 Web Appendices 437 PARTSIX THE FINANCIAL INSTTTUTIONS INDUSTRY Chapter 17 Banking and the Management of Financial Institutions 438 Preview 438 The Bank Balance Sheet 439 Liabilities 439 Assets 441 Basic Banking 443 General Principles of Bank Management 445 Liquidity Management and the Role of Reserves 446 Asset Management 448 Liability Management 449 Capital Adequacy Management 450 THE PRACTIONG MANAGER Strategie* for Managing Bank Capital 452 CASE How a Capital Crunch Caused a Credit Crunch in Off-Balance-Sheet Activities 454 Loan Sales 454 Generation offee Income 454 Trading Activities and Risk Management Techniaues 455 CONRJCTS OF INTEREST Barings, Daiwa, Sumitomo, and Societe Generale: Rogue Traders and the Principal-Agent Problem 456 Measuring Bank Performance 457 Bank's Income Statement 457

15 Contents in Detail 21 Measures ofbank Performance 459 Recent Trends in Bank Performance Measures 460 Summary 462 Key Terms 462 Questions 462 Quantitative Problems 463 Web Exercises 464 Chapter 18 Financial Regulation 465 Preview 465 Asymmetrie Information and Financial Regulation 465 Government Safety Net 465 GLOBAL The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing? 467 Restrictions on Asset Holdings 470 Capital Requirements 470 Prompt Corrective Actum 471 GLOBAL Whither the Basel Accord? 472 Financial Supervision: Charterung and Examination 473 Assessment ofrisk Management 474 Disclosure Requirements 475 Consumer Protection 476 Restrictions on Competition 476 MINI-CASE Mark-to-Market Accounting and the Financial Crisis 477 MINI-CASE The Financial Crisis and Consumer Protection Regulation 478 Summary 478 E-FINANCE Electronic Banking: New Challenges for Bank Regulation 479 GLOBAL International Financial Regulation 480 The 1980s Savings and Loan and Banking Crisis 483 Federal Deposit Insurance Corporation Improvement Act of Banking Crises Throughout the World in Recent Years 485 "Dejä Vu All Over Again" 487 The Dodd-Frank Bill and Future Regulation 488 Dodd-Frank Wall Street Reform and Consumer Protection Act of Future Regulation 489 Summary 491 Key Terms 491 Questions 491 Quantitative Problems 492 Web Exerdses 493 Web Appertefices 493 Chapter 19 Banking Industry: Structure and Competition 494 Preview 494 Historical Development of the Banking System 494 Multiple Regulatory Agencies 496

16 Contents in Detail Financial Innovation and the Growth of the Shadow Banking System 497 Responses to Changes in Demand Conditions: Interest Rate Volatility 498 Responses to Changes in Supply Conditions: Information Technology 499 E-FINANCE Will "Clicks" Dominate "Bricks" in the Banking Industry? 501 E-FINANCE Why Are Scandinavians So Far Ahead of Americans in Using Electronic Payments and Online Banking? 502 E-FINANCE Are We Headed for a Cashless Society? 503 Avoidance ofexisting Regulations 505 MINI-CASE Bruce Bent and the Money Market Mutual Fund Panic of THE PRACTiaNG MANAGER Profiting from a New Financial Product: A Case Study of Treasury Strips 507 Financial Innovation and the Decline of Traditional Banking 509 Structure ofthe U.S. Commercial Banking Industry 513 Restrictions on Branching 514 Response to Branching Restrictions 514 Bank Consolidation and Nationwide Banking 515 E-FINANCE Information Technology and Bank Consolidation 517 The Riegle-Neal Interstate Banking and Branching Efficiency Act of What Will the Structure ofthe U.S. Banking Industry Look Like in the Future? 518 Are Bank Consolidation and Nationwide Banking Good Things? 518 Separation of the Banking and Other Financial Service Industries 519 Erosion of Glass-Steagall 520 The Gramm-Leach-Bliley Financial Services Modernization Act of 1999: Repeal of Glass-Steagall 520 Implications for Financial Consolidation 520 Separation of Banking and Other Financial Services Industries Throughout the World 521 MINI-CASE The Financial Crisis and the Demise of Large, Free-Standing Investment Banks 521 Thrift Industry: Regulation and Structure 522 Savings and Loan Association^ 522 Mutual Savings Banks 523 Credit Unions 523 International Banking 523 Eurodollar Market 524 Structure of U.S. Banking Overseas 525 Foreign Banks in the United States 525 Summary 526 Key Terms 527 Questions 527 Web Exercises 528 Chapter 20 The Mutual Fund Industry 529 Preview 529 The Growth of Mutual Funds 529 The First Mutual Funds 530 Benefits of Mutual Funds 530 Oumership of Mutual Funds 531

17 Contents in Detail 23 Mutual Fund Structure 534 Open- Versus Closed-End Funds 534 Organizational Structure 534 CASE Calculating a Mutual Fund's Net Asset Value 535 Investment Objective Classes 537 Equity Funds 537 Bond Funds 538 Hybrid Funds 538 Money Market Funds 539 Index Funds 540 Fee Structure of Investment Funds 541 Regulation of Mutual Funds 542 Hedge Funds 543 MINI-CASE The Long Term Capital Debacle 545 Confliets of Interest in the Mutual Fund Industry 546 Sources of Confliets of Interest 546 CONFLICTS OF INTEREST Many Mutual Funds Are Caught Ignoring Ethical Standards 547 Mutual Fund Abuses 547 CONFLICTS OF INTEREST SEC Survey Reports Mutual Fund Abuses Widespread 549 Government Response to Abuses 549 Summary 550 Key Terms 550 Questions 551 Quantitative Problems 551 Web Exercises 552 Chapter 21 Insurance Companies and Pension Funds 553 Preview 553 Insurance Companies 554 Fundamentals of Insurance 555 Adverse Selection and Moral Hazard in Insurance 555 Selling Insurance 556 MINI-CASE Insurance Agent: The Customer's Ally 557 Growth and Organization of Insurance Companies 557 Types of Insurance 558 Life Insurance 558 Health Insurance 562 Property and Casualty Insurance 564 Insurance Regulation 565 CONFUCTS OF INTEREST Insurance Behemoth Charged with Confliets of Interest Violations 566 THE PRACTiaNG MANAGER Insurance Management 566 Screening 567 Risk-Based Premium 567 Restrictive Provisions 568 Preventüm of Fraud 568

18 Contents in Detail Cancellation of Insurance 568 Deductibles 568 Coinsurance 569 Limits on the Amount of Insurance 569 Summary 569 Credit Default Swaps 569 CONFLICTS OF INTEREST The AIG Blowup 570 Pensions 571 CONFLICTS OF INTEREST The Subprime Financial Crisis and the Monoline Insurers 571 Types of Pensions 572 Defined-Benefit Pension Plans 572 Defined-Contribution Pension Plans 572 Private and Public Pension Plans 573 MINI-CASE Power to the Pensions 574 Regulation of Pension Plans 577 Employee Retirement Income Security Act 577 Individual Retirement Plans 579 The Future of Pension Funds 580 Summary 580 Key Terms 581 Questions 581 Quantitative Problems 581 Web Exercises 582 Chapter 22 Investment Banks, Security Brokers and Dealers, and Venture Capital Firms 583 Preview 583 Investment Banks 584 Background 584 Underwriting Stocks and Bonds 585 FOLLOWING THE FINANCIAL NEWS New Securities Issues 588 Equity Sales 590 Mergers and Acquisitions 591 Securities Brokers and Dealers 592 Brokerage Services 593 Securities Dealers 595 MINt-CASE Example of Using the Limit-Order Book 596 Regulation of Securities Firms 596 Relationship Between Securities Firms and Commercial Banks 598 Private Equity Investment 598 Venture Capital Firms 598 Private Equity Buyouts 602 Advantages to Private Equity Buyouts 603 E-FWANCE Venture Capitalists Lose Focus with Internet Companies 603 Life Cycle of the Private Equity Buyout 604

19 Contents in Detail 25 Summary 604 Key Terms 605 Questions 605 Quantitative Problems 606 Web Exercises 607 PART SEVEN THE MANAGEMENT OF FINANCIAL INSTITUTIONS Chapter 23 Risk Management in Financial Institutions 608 Preview 608 Managing Credit Risk 609 Screening and Monitoring 609 Long-Term Customer Relationships 610 Loan Commitments 611 Collateral 611 Compensating Balances 612 Credit Rationing 612 Managing Interest-Rate Risk 613 Income Gap Analysis 614 Duration Gap Analysis 616 Example ofa Nonbanking Financial Institution 621 Sorne Problems with Income Gap and Duration Gap Analyses 622 THE PRACTICING MANAGER Strategies for Managing Interest-Rate Risk 624 Summary 625 Key Terms 626 Questions 626 Quantitative Problems 626 Web Exercises 629 Chapter 24 Hedging with Financial Derivatives 630 Preview 630 Hedging 630 Forward Markets 631 Interest-Rate Forward Contracts 631 THE PRACTICING MANAGER Hedging Interest-Rate Risk with Forward Contracts 631 Pros and Cons of Forward Contracts 632 Financial Futures Markets 633 Financial Futures Contracts 633 FOLLOWING THE FINANCIAL NEWS Financial Futures 634 THE PRACTiaNG MANAGER Hedging with Financial Futures 635 Organization of Trading in Financial Futures Markets 637 Globalization of Financial Futures Markets 637 Explaining the Success of Futures Markets 638 MINI-CASE The Hunt Brothers and the Silver Crash 640 THE PRACTiaNG MANAGER Hedging Foreign Exchange Risk with Forward and Futures Contracts 641

20 Contents in Detail Hedging Foreign Exchange Risk with Forward Contracts 641 Hedging Foreign Exchange Risk with Futures Contracts 642 Stock Index Futures 643 Stock Index Futures Contracts 643 MINI-CASE Program Trading and Portfolio Insurance: Were They to Blame for the Stock Market Crash of 1987? 643 FOLLOWING THE FINANCIAL NEWS Stock Index Futures 644 THE PRACTiaNG MANAGER Hedging with Stock Index Futures 645 Options 646 Option Contracts 646 Profits and Losses on Option and Futures Contracts 647 Factors Affecting the Prices of Option Premiums 650 Summary 651 THE PRACTiaNG MANAGER Hedging with Futures Options 653 Interest-Rate Swaps 653 Interest-Rate Swap Contracts 653 THE PRACTICING MANAGER Hedging with Interest-Rate Swaps 653 Advantages of Interest-Rate Swaps 655 Disadvantages of Interest-Rate Swaps 655 Financial Intermediaries in Interest-Rate Swaps 656 Credit Derivatives 656 Credit Options 656 Credit Swaps 657 Credit-Linked Notes 657 CASE Lessons from the Subprime Financial Crisis: When Are Financial Derivatives Likely to Be a Worldwide Time Bomb? 658 Summary 659 Key Terms 660 Questions 660 Quantitative Problems 660 Web Exercises 663 Web Appendices 663 Glossary G-l Index 1-1