PARTⅠ
1OverviewoftheFinancial
Environment
2Chapter1
RoleofFinancialMarketsandInstitutions
OverviewofFinancialMarkets2
MoneyversusCapitalMarkets3
PrimaryversusSecondaryMarkets3
OrganizedversusOver-the-CounterMarkets3
SecuritiesTradedinFinancialMarkets3
MoneyMarketSecurities3
CapitalMarketSecurities4
DerivativeSecurities5
ValuationofSecuritiesinFinancialMarkets6
MarketPricingofSecurities6
MarketEffciency8
FinancialMarketRegulation8
Disclosure8
OtherRegulations9
FinancialMarketGlobalization9
RoleoftheForeignExchangeMarket9
ForeignExchangeRates10
RoleofFinancialInstitutionsinFinancialMarkets10
RoleofDepositoryInstitutions11
RoleofNondepositoryfinancialInstitutions13
ComparisonofRolesamongFinancialInstitutions18
OverviewofFinancialInstitutions19
CompetitionbetweenFinancialInstitutions19
ConsolidationofFinancialInstitutions20
ParticipationinFinancialMarkets24
GlobalExpansionbyFinancialInstitutions27
Summary27■QuestionsandApplications28■
30Chapter2
DeterminationofInterestRates
LoanableFundsTheory30
HouseholdDemandforLoanableFunds31
BusinessDemandforLoanableFunds31
GovernmentDemandforLoanableFunds33
ForeignDemandforLoanableFunds33
AggregateDemandforLoanableFunds34
SupplyofLoanableFunds34
EquilibriumInterestRate36
EconomicForcesThatAffectInterestRates37
ImpactofEconomicGrowthonInterestRates38
ImpactofInflationonInterestRates39
ImpactoftheMoneySupplyonInterestRates41
ImpactoftheBudgetDeficitonInterestRates42
ImpactofForeignFlowsofFundsonInterestRates44
SummaryofForcesThatAffectInterestRates46
EvaluationofInterestRatesoverTime46
ForecastingInterestRates47
Summary49■QuestionsandApplications50■
Problems52■
53Chapter3
StructureofInterestRates
CharacteristicsofDebtSecuritiesThatCauseTheirYields
toVary53
Credit(Default)Risk54
Liquidity56
TaxStatus56
TermtoMaturity57
SpecialProvisions58
ExplainingActualYieldDifferentials59
YieldDifferentialsofMoneyMarketSecurities59
YieldDifferentialsofCapitalMarketSecurities60
EstimatingtheAppropriateYield61
ACloserLookattheTermStructure62
PureExpectationsTheory63
LiquidityPremiumTheory68
SegmentedMarketsTheory70
ResearchonTermStructureTheories72
IntegratingtheTheoriesoftheTermStructure72
UsesoftheTermStructure73
ImpactofDebtManagementonTermStructure75
ImpactofSeptember11ontheTermStructure77
HistoricalReviewoftheTermStructure77
InternationalStructureofInterestRates79
Summary80■QuestionsandApplications81■
Problems82■
IntegrativeProblem:InterestRateForecastsandInvestment
Decisions83
PARTⅡ
85TheFedandMonetaryPolicy
86Chapter4
FunctionsoftheFed
OrganizationoftheFed86
FederalReserveDistrictBanks87
MemberBanks87
BoardofGovernors88
FederalOpenMarketCommittee(FOMC)89
AdvisoryCommittees90
IntegrationofFederalReserveComponents90
MonetaryPolicyTools91
OpenMarketOperations91
AdjustingtheDiscountRate95
AdjustingtheReserveRequirementRatio96
ComparisonofMonetaryPolicyTools98
ImpactofTechnicalFactorsonFunds99
FedControloftheMoneySupply99
LimitationsofControllingMoneySupply100
MonetaryControlActof1980102
GlobalMonetaryPolicy103
ASingleEuroZoneMonetaryPolicy103
GlobalCentralBankCoordination104
Summary104■QuestionsandApplications105■
107Chapter5
MonetaryTheoryandPolicy
MonetaryTheory107
PureKeynesianTheory107
QuantityTheoryandtheMonetaristApproach111
TheoryofRationalExpectations112
WhichTheoryisCorrect?114
TradeoffFacedbytheFed114
ImpactofOtherForcesontheTradeoff115
EconomicIndicatorsMonitoredbytheFed119
IndicatorsofEconomicGrowth119
IndicatorsofInflation120
HowtheFedUsesIndicators120
LagsinMonetaryPolicy121
AssessingtheImpactofMonetaryPolicy121
ForecastingMoneySupplyMovements122
ForecastingtheImpactofMonetaryPolicy126
IntegratingMonetaryandFiscalPolicies127
History128
MonetizingtheDebt129
MarketAssessmentofIntegratedPolicies131
GlobalEffectsofMonetaryPolicy131
ImpactoftheDollar132
ImpactofGlobalEconomicConditions132
TransmissionofInterestRates132
FedPolicyduringtheAsianCr/s/s133
Summary133■QuestionsandApplications134■
IntegrativeProblem:FedWatching136
PARTⅢ
139DebtSecurityMarkets
140Chapter6
MoneyMarkets
MoneyMarketSecurities140
TreasuryBills141
CommercialPaper144
NegotiableCertificatesofDeposit(NCDs)146
RepurchaseAgreements146
FederalFunds147
Banker'sAcceptances148
InstitutionalUseofMoneyMarkets150
ValuationofMoneyMarketSecurities151
ExplainingMoneyMarketPriceMovements152
IndicatorsofFutureMoneyMarketSecurityPrices153
RiskofMoneyMarketSecurities153
MeasuringRisk154
InteractionamongMoneyMarketYields155
GlobalizationofMoneyMarkets155
EurodollarDepositsandEuronotes156
Euro-CommercialPaper156
PerformanceofForeignMoneyMarketSecurities157
Summary155■QuestionsandApplications159■
Problems160■
162Chapter7
BondMarkets
BackgroundonBonds162
BondYields162
TreasuryandFederalAgencyBonds163
TreasuryBondAuction163
TradingTreasuryBonds164
TreasuryBondQuotations165
StrippedTreasuryBonds166
Inflation-IndexedTreasuryBonds166
BradyBonds166
FederalAgencyBonds167
MunicipalBonds167
TradingandQuotations168
CorporateBonds168
PrivatePlacementsofCorporateBonds169
CharacteristicsofCorporateBonds169
TradingCorporateBonds171
CorporateBondQuotations171
JunkBonds172
HowCorporateBondsFacilitateRestructuring175
InstitutionalUseofBondMarkets176
GlobalizationofBondMarkets177
EurobondMarket178
TaxEffects179
Summary179■QuestionsandApplications180■
182Chapter8
BondValuationandRisk
BondValuationProcess182
BondValuationwithaPresentValueTable183
ImpactoftheDiscountRateonBondValuation184
ImpactoftheTimingofPaymentsonBond
Valuation184
ValuationofBondswithSemiannualPayments184
UseofAnnuityTablesforValuation186
RelationshipsBetweenCouponRate,RequiredReturn,and
BondPrice186
ImplicationsforFinancialInstitutions188
ExplainingBondPriceMovements189
FactorsThatAffecttheRisk-FreeRate189
FactorsThatAffecttheCredit(Default)Risk
Premium191
SummaryofFactorsAffectingBondPrices193
SensitivityofBondPricestoInterestRateMovements194
BondPriceElasticity195
Duration197
BondInvestmentStrategiesUsedbyInvestors199
MatchingStrategy199
ladderedStrategy199
BarbellStrategy200
InterestRateStrategy200
ReturnandRiskofInternationalBonds200
InfluenceofForeignInterestRateMovements201
InfluenceofCreditRisk201
InfluenceofExchangeRateFluctuations201
InternationalBondDiversification202
Summary203■QuestionsandApplications203■
Problems205■
APPENDIX8:ForecastingBondPricesandYields207
ForecastingBondPortfolioValues209
ForecastingBondPortfolioReturns210
216Chapter9
MortgageMarkets
BackgroundonMortgages216
ResidentialMortgageCharacteristics217
InsuredversusConventionalMortgages218
Fixed-RateversusAdjustable-RateMortgages218
MortgageMaturities219
CreativeMortgageFinancing221
Graduated-PaymentMortgage(GPM)222
Growing-EquityMortgage222
SecondMortgage222
Shared-AppreciationMortgage222
ActivitiesintheMortgageMarket223
HowtheSecondaryMarketFacilitatesMortgage
Activities223
UnbundlingofMortgageActivities223
InstitutionalUseofMortgageMarkets224
ValuationofMortgages226
FactorsThatAffecttheRisk-FreeInterestRate227
FactorsThatAffecttheRiskPremium228
SummaryofFactorsAffectingMortgagePrices228
IndicatorsofChangesinMortgagesPrices229
RiskfromInvestingmMortgages230
InterestRateRisk230
PrepaymentRisk231
CreditRisk231
MeasuringRisk232
UseofMortgage-BackedSecurities233
GinnieMaeMortgage-BackedSecurities234
FannieMaeMortgage-BackedSecurities234
PubliclyIssuedPass-ThroughSecurities(PIPs)235
ParticipationCertificates(PC)s235
CollateralizedMortgageObligations(CMOs)235
Mortgage-BackedSecuritiesforSmallInvestors236
GlobalizationofMortgageMarkets237
Summary237■QuestionsandApplications238■
IntegrativeProblem:AssetAllocation239
PARTⅣ
241EquityMarkets
242Chapter10
StockOfferingsandinvestorMonitoring
BackgroundonStock242
OwnershipandVotingRights242
PreferredStock242
IssuerParticipationinStockMarkets243
InitialPublicOfferings244
ProcessofGoingPublic244
UnderwriterEffortstoEnsurePriceStability245
TimingoflPOs247
InitialReturnsoflPOs248
Long-TermPerformanceFollowingIPOs249
SecondaryStockOfferings250
Shelf-Registration251
StockExchanges251
OrganizedExchanges251
Over-the-CounterMarket253
ConsolidationofStockExchanges254
LateTradingProvidedbyExchanges254
StockQuotationsProvidedbyExchanges255
StockIndexQuotations257
InvestorParticipationintheSecondaryMarket258
HowInvestorDecisionsAffecttheStockPrice259
TypesofInvestors260
MonitoringbyInvestors262
ShareholderActivism262
TheCorporateMonitoringRole263
StockRepurchases264
MarketforCorporateControl264
BarrierstoCorporateControl265
GlobalizationofStockMarkets266
ForeignStockOfferingsintheUnitedStates266
InternationalPlacementProcess267
GlobalStockExchanges267
EmergingStockMarkets268
MethodsUsedtoInvestinForeignStocks269
Summary270■QuestionsandApplications270■
272Chapter11
StockValuationandRisk
StockValuationMethods272
Price-Earnings(PE)Method272
DividendDiscountModel273
AdjustingtheDividendDiscountModel275
DeterminingtheRequiredRateofReturntoValueStocks277
CapitalAssetPricingModel277
ArbitragePricingModel279
FactorsThatAffectStockPrices279
EconomicFactors279
Market-RelatedFactors281
Firm-SpecificFactors282
IntegrationofFactorsAffectingStockPrices283
RoleofAnalystsinValuingStocks285
Conflictsoflnterest285
ImpactofDisclosureRegulations285
UnbiasedAnalystRatingServices286
StockRisk286
MeasuresofRisk287
ApplyingValueatRisk290
MethodsofDeterminingtheMaximumExpected
Loss290
DerivingtheMaximumDollarLoss291
CommonAdjustmentstotheValue-at-Risk
Applications292
ForecastingStockPriceVolatilityandBeta293
MethodsofForecastingStockPriceVolatility293
ForecastingaStockPortfolio'sVolatility294
ForecastingaStockPortfolio'sBeta294
StockPerformanceMeasurement295
SharpeIndex295
TreynorIndex295
StockMarketEfficiency296
FormsofEffciency296
TestsoftheEffcientMarketHypothesis297
ForeignStockValuation,Performance,andEffciency299
ValuationofForeignStocks299
MeasuringPerformancefromInvestinginForeign
Stocks299
PerformancefromGlobalDiversification300
InternationalMarketEffciency302
Summary302■QuestionsandAppllcations303■
Problems304■
APPENDIX11A:StockValuation:LessonsfromEnrorsDemise306
313Chapter12
MarketMicrostructureandStrategies
StockMarketTransactions313
PlacinganOrder313
MarginTrading314
ShortSelling316
InvestinginStockIndexes317
HowTradesareExecuted319
FloorBrokers319
SpecialistsandMarket-Makers319
ElectronicCommunicationNetworks(ECNs)320
ProgramTrading323
RegulationofStockTrading324
CircuitBreakers324
SecuritiesandExchangeCommission(SEC)324
HowBarrierstoInternationalStockTradingHave
Decreased327
ReductioninTransactionCosts327
ReductioninInformationCosts327
ReductioninExchangeRateRisk328
Summary328■QuestionsandApplications328■
Problems330■
IntegrativeProblem:StockMarketAnalysis331
333DerivativeSecurityMarkets
334Chapter13
FinancialFuturesMarkets
BackgroundonFinancialFutures334
StepsInvolvedinTradingFutures335
PurposeofTradingFinancialFutures336
InterpretingFinancialFuturesTables336
ValuationofFinancialFutures338
ImpactoftheOpportunityCosts338
ExplainingPriceMovementsofBondFuturesContracts338
SpeculatingwithInterestRateFutures340
ImpactofLeverage340
ClosingOuttheFuturesPosition341
HedgingwithInterestRateFutures342
UsingInterestRateFuturestoCreateaShortHedge
343
UsinglnterestRateFuturestoCreateaLongHedge345
HedgingNetExposure346
BondIndexFutures346
StockIndexFutures347
ValuingStockIndexFuturesContracts348
SpeculatingwithStockIndexFutures349
HedgingwithStockIndexFutures349
DynamicAssetAllocationwithStockIndexFutures351
PricesofStockIndexFuturesversusStocks352
ArbitragewithStockIndexFutures352
CircuitBreakersonStockIndexFutures353
RiskofTradingFuturesContracts354
MarketRisk354
BasisRisk354
LiquidityRisk355
CreditRisk355
PrepaymentRisk355
OperationalRisk355
RegulationintheFuturesMarkets356
InstitutionalUseofFuturesMarkets356
GlobalizationofFuturesMarkets357
Non-U.S.ParticipationinU.S.FuturesContracts357
ForeignStockIndexFutures357
CurrencyFuturesContracts358
Summary359■QuestionsandApplications359■
Problems361■
362Chapter14
OptionsMarkets
BackgroundonOptions362
MarketsUsedtoTradeOptions363
HowOptionTradesAreExecuted364
TypesofOrders365
StockOptionQuotations365
SpeculatingwithStockOptions366
SpeculatingwithCallOptions366
SpeculatingwithPutOptions368
DeterminantsofStockOptionPremiums370
DeterminantsofCallOptionPremiums370
DeterminantsofPutOptionPremiums371
ExplainingChangeInOptionPremiums373
IndicatorsMonitoredbyParticipantsintheOptions
Market374
HedgingwithStockOptions375
HedgingwithCallOptions375
HedgingwithPutOptions375
UsingOptionstoMeasureaStock'sRisk377
StockIndexOptions377
HedgingwithStockIndexOptions378
DynamicAssetAllocationwithStockIndex
Options378
UsingIndexOptionstoMeasuretheMarket'sRisk379
OptionsonFuturesContracts381
SpeculatingwithOptionsonFutures381
HedgingwithOptionsonFutures384
HedgingwithOptionsonInterestRateFutures384
HedgingwithOptionsonStockIndexFutures386
InstitutionalUseofOptionsMarkets387
GlobalizationofOptionsMarkets388
CurrencyOptionsContracts388
Summary398■QuestionsandApplications389■
Problems391■
APPENDIX14:OptionValuation393
401Chapter15
InterestRateDerivativeMarkets
Background401
ParticipationbyFinancialInstitutions403
TypesofImerestRateSwaps404
PlainVanillaSwaps405
ForwardSwaps405
CallableSwaps407
PutableSwaps408
ExtendableSwaps408
Zero-Coupon-for-FloatingSwaps409
Rate-CappedSwaps409
EquitySwaps410
OtherTypesofSwaps411
RiskofInterestRateSwaps412
BasisRisk412
CreditRisk413
SovereignRisk413
PricingInterestRateSwaps414
PrevailingMarketInterestRates414
AvailabilityofCounterparties414
CreditandSovereignRisk414
FactorsAffectingthePerformanceofInterestRateSwaps414
IndicatorsMonitoredbyParticipantsintheSwap
Market415
InterestRateCaps,Floors,andCollars416
InterestRateCaps416
InterestRateFloors417
InterestRateCollars417
GlobalizationofSwapMarkets419
CurrencySwaps420
RiskofCurrencySwaps422
Summary422■QuestionsandApplications422■
Problems421■
425Chapter16
ForeignExchangeDerivativeMarkets
BackgroundonForeignExchangeMarkets425
InstitutionalUseofForeignExchangeMarkets426
ExchangeRateQuotations427
TypesofExchangeRateSystems427
FactorsAffectingExchangeRates430
DifferentialInflationRates431
DifferentialInterestRates431
CentralBankIntervention432
IndirectIntervention433
ForeignExchangeContracts434
MovementsinExchangeRates434
ForecastingExchangeRates434
TechnicalForecasting435
FundamentalForecasting436
Market-BasedForecasting437
MixedForecasting437
ForecastingExchangeRateVolatility438
SpeculationinForeignExchangeMarkets440
ForeignExchangeDerivatives440
ForwardContracts441
CurrencyFuturesContracts442
CurrencySwaps442
CurrencyOptionsContracts442
UseofForeignExchangeDerivativesfor
Speculating444
InternationalArbitrage446
LocationalArbitrage446
CoveredInterestArbitrage447
ExplainingPriceMovementsofForeignExchange
Derivatives449
IndicatorsofForeignExchangeDerivativePrices449
Summary450■QuestionsandApplications451■
Problems452■
APPENDIX16A:ImpactoftheAsianCrisisonForeignExchange
MarketsandOtherFinancialMarkets453
APPENDIX16B:CurrencyOptionPricing463
IntegrativeProblem:ChoosingamongDerivativeSecurities467
G-1Glossary
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