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Financial Institutions, Markets, and Money, Eleventh Edition

Book Description

Kidwell's Financial Institutions 11th Edition presents a balanced introduction to the operation, mechanics, and structure of the U.S. financial system, emphasizing its institutions, markets, and financial instruments. The text discusses complex topics in a clear and concise fashion with an emphasis on "Real World" data, and people and event boxes, as well as personal finance examples to help retain topical interest.

Each author brings something unique to this new edition. David Kidwell, formerly Dean of the Carlson School of Business, is a gifted storyteller with a keen insight on what it takes to reach readers. He is also currently writing a Corporate Finance text and is Chair of the Finance department at Texas A&M University. David Whidbee is an Assoc. Dean at Washington State University. He has won numerous teaching and research awards.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. PREFACE
    1. WHY READ THIS BOOK?
    2. WHY THIS EDITION IS BETTER THAN PREVIOUS ONES
    3. ORGANIZATION OF THE BOOK
    4. ANCILLARY PACKAGE
    5. ACKNOWLEDGMENTS
  5. ABOUT THE AUTHORS
  6. Contents
  7. PART I: THE FINANCIAL SYSTEM
    1. CHAPTER ONE: An Overview of Financial Markets and Institutions
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 1.1 THE FINANCIAL SYSTEM
      4. 1.2 FINANCIAL MARKETS AND DIRECT FINANCING
      5. DO YOU UNDERSTAND?
      6. PEOPLE & EVENTS: Wall Street Faces Global Competition
      7. 1.3 TYPES OF FINANCIAL MARKETS
      8. 1.4 THE MONEY MARKETS
      9. 1.5 THE CAPITAL MARKETS
      10. DO YOU UNDERSTAND?
      11. 1.6 FINANCIAL INTERMEDIARIES AND INDIRECT FINANCING
      12. DO YOU UNDERSTAND?
      13. 1.7 TYPES OF FINANCIAL INTERMEDIARIES
      14. Do You Understand?
      15. 1.8 THE RISKS FINANCIAL INSTITUTIONS MANAGE
      16. 1.9 REGULATION OF THE FINANCIAL SYSTEM
      17. DO YOU UNDERSTAND?
      18. SUMMARY OF LEARNING OBJECTIVES
      19. KEY TERMS
      20. QUESTIONS AND PROBLEMS
      21. INTERNET EXERCISE
    2. CHAPTER TWO: The Federal Reserve and Its Powers
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 2.1 ORIGINS OF THE FEDERAL RESERVE SYSTEM
      4. PEOPLE & EVENTS: Free Banking and Wildcat Banks
      5. 2.2 THE CURRENT STRUCTURE OF THE FED
      6. 2.3 MONETARY POWERS OF THE BOARD OF GOVERNORS
      7. 2.4 THE FED'S REGULATORY POWERS
      8. 2.5 INDEPENDENCE OF THE FED
      9. DO YOU UNDERSTAND?
      10. 2.6 THE FED'S BALANCE SHEET
      11. LEARNING BY DOING 2.1: Computing a Bank's Excess Reserve Position
      12. 2.7 THE FED'S ROLE IN CHECK CLEARING
      13. 2.8 FEDERAL RESERVE TOOLS OF MONETARY POLICY
      14. PEOPLE & EVENTS: A Contrast in Style: Greenspan Versus Bernanke
      15. LEARNING BY DOING 2.2: Calculating a Bank's Reserve Position
      16. SUMMARY OF LEARNING OBJECTIVES
      17. KEY TERMS
      18. QUESTIONS AND PROBLEMS
      19. INTERNET EXERCISE
    3. CHAPTER THREE: The Fed and Interest Rates
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 3.1 FEDERAL RESERVE CONTROL OF THE MONEY SUPPLY
      4. 3.2 THE FED'S INFLUENCE ON INTEREST RATES
      5. 3.3 THE TREASURY DEPARTMENT AND FISCAL POLICY
      6. DO YOU UNDERSTAND?
      7. 3.4 GOALS OF MONETARY POLICY
      8. PEOPLE & EVENTS: The Fed as Lender of Last Resort: Preventing a Financial Panic
      9. 3.5 THE FED AND THE ECONOMY
      10. PEOPLE & EVENTS: Black Monday
      11. 3.6 COMPLICATIONS OF MONETARY POLICY
      12. 3.7 ANATOMY OF A FINANCIAL CRISIS
      13. DO YOU UNDERSTAND?
      14. SUMMARY OF LEARNING OBJECTIVES
      15. KEY TERMS
      16. QUESTIONS AND PROBLEMS
      17. INTERNET EXERCISE
  8. PART II: HOW INTEREST RATES ARE DETERMINED
    1. CHAPTER FOUR: The Level of Interest Rates
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 4.1 WHAT ARE INTEREST RATES?
      4. 4.2 THE REAL RATE OF INTEREST
      5. 4.3 LOANABLE FUNDS THEORY OF INTEREST
      6. DO YOU UNDERSTAND?
      7. 4.4 PRICE EXPECTATIONS AND INTEREST RATES
      8. PEOPLE & EVENTS: Irving Fisher (1867–1947): Economist
      9. DO YOU UNDERSTAND?
      10. PEOPLE & EVENTS: Estimating the Expected Rate of Inflation from TIPS
      11. 4.5 FORECASTING INTEREST RATES
      12. SUMMARY OF LEARNING OBJECTIVES
      13. KEY TERMS
      14. QUESTIONS AND PROBLEMS
      15. INTERNET EXERCISE
    2. CHAPTER FIVE: Bond Prices and Interest Rate Risk
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 5.1 THE TIME VALUE OF MONEY
      4. DO YOU UNDERSTAND?
      5. 5.2 BOND PRICING
      6. PEOPLE & EVENTS: Rogue Trader Incurs Huge Financial Losses for French Bank
      7. LEARNING BY DOING 5.1: Calculating the Price of a Bond Using a Financial Calculator
      8. 5.3 BOND YIELDS
      9. LEARNING BY DOING 5.2: Calculating the Yield-to-Maturity on a Bond
      10. DO YOU UNDERSTAND?
      11. 5.4 IMPORTANT BOND PRICING RELATIONSHIPS
      12. 5.5 INTEREST RATE RISK AND DURATION
      13. LEARNING BY DOING 5.3: Calculating the Duration of a Bond
      14. PEOPLE & EVENTS: Betting the Farm on Interest Rates and Losing
      15. DO YOU UNDERSTAND?
      16. SUMMARY OF LEARNING OBJECTIVES
      17. KEY TERMS
      18. QUESTIONS AND PROBLEMS
      19. INTERNET EXERCISE
    3. CHAPTER SIX: The Structure of Interest Rates
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 6.1 THE TERM STRUCTURE OF INTEREST RATES
      4. LEARNING BY DOING 6.1: Using the Term Structure Formula to Calculate Implied Forward Rates
      5. DO YOU UNDERSTAND?
      6. 6.2 DEFAULT RISK
      7. PEOPLE & EVENTS: The Credit-Rating Club
      8. 6.3 TAX TREATMENT
      9. DO YOU UNDERSTAND?
      10. 6.4 MARKETABILITY
      11. 6.5 OPTIONS ON DEBT SECURITIES
      12. 6.6 BEHAVIOR OF INTEREST RATES OVER THE BUSINESS CYCLE
      13. DO YOU UNDERSTAND?
      14. SUMMARY OF LEARNING OBJECTIVES
      15. KEY TERMS
      16. QUESTIONS AND PROBLEMS
      17. INTERNET EXERCISE
  9. PART III: FINANCIAL MARKETS
    1. CHAPTER SEVEN: Money Markets
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 7.1 HOW THE MONEY MARKETS WORK
      4. 7.2 ECONOMIC ROLE OF THE MONEY MARKETS
      5. 7.3 FEATURES OF MONEY MARKET INSTRUMENTS
      6. 7.4 TREASURY BILLS
      7. LEARNING BY DOING 7.1: Calculating the Discount Yield
      8. LEARNING BY DOING 7.2: Calculating the Bond Equivalent Yield
      9. DO YOU UNDERSTAND?
      10. 7.5 FEDERAL AGENCY SECURITIES
      11. 7.6 FED FUNDS
      12. 7.7 OTHER MAJOR MONEY MARKET INSTRUMENTS
      13. PEOPLE & EVENTS: Lehman Brothers' “Creative” Accounting: Repos 105 and 108
      14. 7.8 MONEY MARKET PARTICIPANTS
      15. 7.9 THE IMPACT OF THE 2007–2009 FINANCIAL CRISIS ON THE MONEY MARKETS
      16. PEOPLE & EVENTS: How Breaking the Buck (Almost) Broke the Commercial Paper Market
      17. DO YOU UNDERSTAND?
      18. SUMMARY OF LEARNING OBJECTIVES
      19. KEY TERMS
      20. QUESTIONS AND PROBLEMS
      21. INTERNET EXERCISE
    2. CHAPTER EIGHT: Bond Markets
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 8.1 FUNCTIONS OF THE CAPITAL MARKETS
      4. 8.2 U.S. GOVERNMENT AND AGENCY SECURITIES
      5. PEOPLE & EVENTS: What Do Negative Yields on TIPS Tell Us?
      6. DO YOU UNDERSTAND?
      7. 8.3 STATE AND LOCAL GOVERNMENT BONDS
      8. 8.4 CORPORATE BONDS
      9. DO YOU UNDERSTAND?
      10. 8.5 FINANCIAL GUARANTEES
      11. 8.6 SECURITIZED CREDIT INSTRUMENTS
      12. 8.7 FINANCIAL MARKET REGULATORS
      13. 8.8 BOND MARKETS AROUND THE WORLD ARE INCREASINGLY LINKED
      14. 8.9 THE IMPACT OF THE 2007–2009 FINANCIAL CRISIS ON THE BOND MARKETS
      15. DO YOU UNDERSTAND?
      16. SUMMARY OF LEARNING OBJECTIVES
      17. KEY TERMS
      18. QUESTIONS AND PROBLEMS
      19. INTERNET EXERCISE
    3. CHAPTER NINE: Mortgage Markets
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 9.1 THE UNIQUE NATURE OF MORTGAGE MARKETS
      4. 9.2 TYPES OF MORTGAGES
      5. 9.3 MORTGAGE QUALIFYING
      6. LEARNING BY DOING 9.1: Determining How Much Home You Can Buy
      7. DO YOU UNDERSTAND?
      8. 9.4 MORTGAGE BACKED SECURITIES
      9. 9.5 MORTGAGE PREPAYMENT RISK
      10. DO YOU UNDERSTAND?
      11. 9.6 PARTICIPANTS IN THE MORTGAGE MARKETS
      12. PEOPLE & EVENTS: The Rise and Fall of Fannie and Freddie
      13. 9.7 RELATIONSHIP BETWEEN MORTGAGE MARKETS AND THE CAPITAL MARKETS
      14. SUMMARY OF LEARNING OBJECTIVES
      15. KEY TERMS
      16. QUESTIONS AND PROBLEMS
      17. INTERNET EXERCISE
    4. CHAPTER TEN: Equity Markets
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 10.1 WHAT ARE EQUITY SECURITIES?
      4. 10.2 EQUITY MARKETS
      5. 10.3 EQUITY TRADING
      6. 10.4 GLOBAL STOCK MARKETS
      7. 10.5 REGULATION OF EQUITY MARKETS
      8. DO YOU UNDERSTAND?
      9. 10.6 EQUITY VALUATION BASICS
      10. LEARNING BY DOING 10.1: Valuing a Stock
      11. 10.7 EQUITY RISK
      12. DO YOU UNDERSTAND?
      13. 10.8 STOCK MARKET INDEXES
      14. PEOPLE & EVENTS: Circuit Breakers, Black Monday, and the Flash Crash
      15. 10.9 THE STOCK MARKET AS A PREDICTOR OF ECONOMIC ACTIVITY
      16. SUMMARY OF LEARNING OBJECTIVES
      17. KEY TERMS
      18. QUESTIONS AND PROBLEMS
      19. INTERNET EXERCISE
    5. CHAPTER ELEVEN: Derivatives Markets
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 11.1 THE NATURE OF DERIVATIVE SECURITIES
      4. 11.2 FORWARD MARKETS
      5. 11.3 FUTURES MARKETS
      6. DO YOU UNDERSTAND?
      7. 11.4 USES OF THE FINANCIAL FUTURES MARKETS
      8. LEARNING BY DOING 11.1 Hedging Risk in a Stock Portfolio
      9. 11.5 RISKS IN THE FUTURES MARKETS
      10. DO YOU UNDERSTAND?
      11. 11.6 OPTIONS MARKETS
      12. DO YOU UNDERSTAND?
      13. 11.7 REGULATION OF THE FUTURES AND OPTIONS MARKETS
      14. 11.8 SWAP MARKETS
      15. PEOPLE & EVENTS: Swap Market Regulation
      16. SUMMARY OF LEARNING OBJECTIVES
      17. KEY TERMS
      18. QUESTIONS AND PROBLEMS
      19. INTERNET EXERCISE
    6. CHAPTER TWELVE: International Markets
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 12.1 THE DIFFICULTIES OF INTERNATIONAL TRADE
      4. 12.2 EXCHANGE RATES
      5. 12.3 BALANCE OF PAYMENTS
      6. 12.4 FOREIGN EXCHANGE MARKETS
      7. 12.5 SPOT AND FORWARD TRANSACTIONS
      8. LEARNING BY DOING 12.1: Using Forward Contracts to Hedge Exchange Rate Risks
      9. PEOPLE & EVENTS: The Big Mac Test of Purchasing Power Parity
      10. 12.6 CAPITAL FLOWS AND EXCHANGE RATES
      11. DO YOU UNDERSTAND?
      12. 12.7 GOVERNMENT INTERVENTION IN FOREIGN EXCHANGE MARKETS
      13. LEARNING BY DOING 12.2: Using Purchasing Power Parity to Determine the Expected Exchange Rate
      14. 12.8 FINANCING INTERNATIONAL TRADE
      15. DO YOU UNDERSTAND?
      16. 12.9 INTERNATIONAL MONEY AND CAPITAL MARKETS
      17. 12.10 THE GLOBALIZATION OF FINANCIAL MARKETS
      18. SUMMARY OF LEARNING OBJECTIVES
      19. KEY TERMS
      20. QUESTIONS AND PROBLEMS
      21. INTERNET EXERCISE
  10. PART IV: COMMERCIAL BANKING
    1. CHAPTER THIRTEEN: Commercial Bank Operations
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 13.1 AN OVERVIEW OF THE BANKING INDUSTRY
      4. 13.2 BALANCE SHEET FOR A COMMERCIAL BANK
      5. 13.3 THE SOURCE OF BANK FUNDS
      6. DO YOU UNDERSTAND?
      7. 13.4 BANK USES OF FUNDS: BANK INVESTMENTS AND CASH ASSETS
      8. 13.5 BANK USES OF FUNDS: LOANS AND LEASES
      9. 13.6 LOAN PRICING
      10. 13.7 ANALYSIS OF LOAN CREDIT RISK
      11. PEOPLE & EVENTS: What's Your Score?
      12. DO YOU UNDERSTAND?
      13. 13.8 FEE-BASED SERVICES
      14. 13.9 OFFBALANCE-SHEET BANKING
      15. DO YOU UNDERSTAND?
      16. 13.10 BANK EARNINGS
      17. 13.11 BANK PERFORMANCE
      18. DO YOU UNDERSTAND?
      19. 13.12 BANK AND FINANCIAL HOLDING COMPANIES
      20. SUMMARY OF LEARNING OBJECTIVES
      21. KEY TERMS
      22. QUESTIONS AND PROBLEMS
      23. INTERNET EXERCISE
    2. CHAPTER FOURTEEN: International Banking
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 14.1 DEVELOPMENT OF INTERNATIONAL BANKING
      4. 14.2 REGULATION OF OVERSEAS BANKING ACTIVITIES
      5. PEOPLE & EVENTS: Credit Risk, Subprime Mortgage Crisis of 2007, and Challenges to the Banking Sector
      6. 14.3 DELIVERY OF OVERSEAS BANKING SERVICES
      7. DO YOU UNDERSTAND?
      8. 14.4 INTERNATIONAL LENDING
      9. DO YOU UNDERSTAND?
      10. 14.5 FOREIGN BANKS IN THE UNITED STATES
      11. 14.6 FUTURE DIRECTIONS OF INTERNATIONAL BANKING
      12. SUMMARY OF LEARNING OBJECTIVES
      13. KEY TERMS
      14. QUESTIONS AND PROBLEMS
      15. INTERNET EXERCISE
    3. CHAPTER FIFTEEN: Regulation of Financial Institutions
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 15.1 REASONS FOR REGULATION
      4. 15.2 BANK FAILURES AND REGULATION
      5. PEOPLE & EVENTS: WaMu and the Destructive “Power of Yes”
      6. 15.3 SAFETY AND SOUNDNESS REGULATION: DEPOSIT INSURANCE
      7. DO YOU UNDERSTAND?
      8. 15.4 DEPOSIT INSURANCE ISSUES
      9. DO YOU UNDERSTAND?
      10. 15.5 SAFETY AND SOUNDNESS REGULATION: CAPITAL REQUIREMENTS
      11. DO YOU UNDERSTAND?
      12. 15.6 BANK EXAMINATIONS
      13. 15.7 STRUCTURE AND COMPETITION REGULATIONS
      14. 15.8 CONSUMER PROTECTION REGULATIONS
      15. PEOPLE & EVENTS: Dual or Dueling Banking Systems?
      16. 15.9 BANK REGULATORS
      17. DO YOU UNDERSTAND?
      18. SUMMARY OF LEARNING OBJECTIVES
      19. KEY TERMS
      20. QUESTIONS AND PROBLEMS
      21. INTERNET EXERCISE
  11. PART V: FINANCIAL INSTITUTIONS
    1. CHAPTER SIXTEEN: Thrift Institutions and Finance Companies
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 16.1 HISTORICAL DEVELOPMENT OF SAVINGS INSTITUTIONS
      4. 16.2 OPERATIONS OF SAVINGS INSTITUTIONS
      5. DO YOU UNDERSTAND?
      6. 16.3 CREDIT UNIONS
      7. PEOPLE & EVENTS: Demographic Change Brings Opportunity
      8. PEOPLE & EVENTS: Commercial Banks Versus Credit Unions
      9. 16.4 THRIFT INSTITUTIONS AROUND THE GLOBE
      10. DO YOU UNDERSTAND?
      11. 16.5 FINANCE COMPANIES
      12. DO YOU UNDERSTAND?
      13. SUMMARY OF LEARNING OBJECTIVES
      14. KEY TERMS
      15. QUESTIONS AND PROBLEMS
      16. INTERNET EXERCISE
    2. CHAPTER SEVENTEEN: Insurance Companies and Pension Funds
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 17.1 INSURANCE
      4. PEOPLE & EVENTS: 9/11 and Katrina: Insurance Coverage Disputes
      5. 17.2 THE INSURANCE INDUSTRY
      6. PEOPLE & EVENTS: The Rise, Fall, and Return of American International Group (AIG)
      7. DO YOU UNDERSTAND?
      8. 17.3 LIFE AND HEALTH INSURANCE
      9. LEARNING BY DOING 17.1: Calculating Policyholders' Surplus
      10. DO YOU UNDERSTAND?
      11. 17.4 PROPERTY AND LIABILITY INSURANCE
      12. LEARNING BY DOING 17.2: Measuring Insurance Company Profitability with the Combined Ratio
      13. DO YOU UNDERSTAND?
      14. 17.5 PENSIONS
      15. DO YOU UNDERSTAND?
      16. SUMMARY OF LEARNING OBJECTIVES
      17. KEY TERMS
      18. QUESTIONS AND PROBLEMS
      19. INTERNET EXERCISE
    3. CHAPTER EIGHTEEN: Investment Banking
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 18.1 THE RELATIONSHIP BETWEEN COMMERCIAL AND INVESTMENT BANKING
      4. PEOPLE & EVENTS: Where, Oh, Where Have All the Investment Banks Gone?
      5. 18.2 PRIMARY SERVICES OF AN INVESTMENT BANK
      6. DO YOU UNDERSTAND?
      7. 18.3 PRIVATE EQUITY
      8. LEARNING BY DOING 18.1: Evaluating a Venture Capital Investment
      9. DO YOU UNDERSTAND?
      10. SUMMARY OF LEARNING OBJECTIVES
      11. KEY TERMS
      12. QUESTIONS AND PROBLEMS
      13. INTERNET EXERCISE
    4. CHAPTER NINETEEN: Investment Companies
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 19.1 INVESTMENT COMPANIES
      4. 19.2 OPEN-END MUTUAL FUNDS
      5. LEARNING BY DOING 19.1: Calculating Net Asset Value
      6. PEOPLE & EVENTS: Money Market Mutual Funds Breaking the Buck
      7. 19.3 CLOSED END MUTUAL FUNDS
      8. 19.4 EXCHANGE TRADED FUNDS
      9. DO YOU UNDERSTAND?
      10. 19.5 HEDGE FUNDS
      11. PEOPLE & EVENTS: Hedge Funds and the Dodd-Frank Wall Street Reform and Consumer Protection Act
      12. DO YOU UNDERSTAND?
      13. 19.6 REAL ESTATE INVESTMENT TRUSTS
      14. SUMMARY OF LEARNING OBJECTIVES
      15. KEY TERMS
      16. QUESTIONS AND PROBLEMS
      17. INTERNET EXERCISE
    5. CHAPTER TWENTY: Risk Management in Financial Institutions
      1. CHAPTER PREVIEW
      2. LEARNING OBJECTIVES
      3. 20.1 THE DILEMMA: PROFITABILITY VERSUS SAFETY
      4. 20.2 LIQUIDITY MANAGEMENT
      5. PEOPLE & EVENTS: Operational Risk
      6. DO YOU UNDERSTAND?
      7. 20.3 MANAGING CREDIT RISK
      8. PEOPLE & EVENTS: Counterparty Controversy: AIG and Its Risky Risk Management
      9. DO YOU UNDERSTAND?
      10. 20.4 MEASURING AND ASSESSING INTEREST RATE RISK
      11. 20.5 HEDGING INTEREST RATE RISK
      12. LEARNING BY DOING 20.1: Measuring Interest Rate Risk
      13. DO YOU UNDERSTAND?
      14. SUMMARY OF LEARNING OBJECTIVES
      15. KEY TERMS
      16. QUESTIONS AND PROBLEMS
      17. INTERNET EXERCISE
  12. Glossary
  13. Credits and Acknowledgments
  14. Index