,PART 1 Introduction 1
CHAPTER j 1
Why jStudy jMoney, jBanking, jand jFinancial jMarkets? 2
Why jStudy jFinancial jMarkets? .......................................................................... 2
The jBond jMarket jand jInterest jRates ...................................................................................... 3
The j Stock j Market ................................................................................................................... 3
Why jStudy jFinancial jInstitutions jand jBanking? ..................................................... 5
Structure jof jthe jFinancial jSystem........................................................................................... 6
Banks jand jOther jFinancial jInstitutions.................................................................................. 6
Financial j Innovation ................................................................................................................ 6
Financial j Crises ........................................................................................................................ 7
Why jStudy j Money jand j Monetary j Policy? .......................................................... 7
Money jand jBusiness jCycles..................................................................................................... 7
Money jand jInflation ................................................................................................................ 8
Money jand jInterest jRates...................................................................................................... 10
Conduct jof jMonetary jPolicy .................................................................................................. 10
Fiscal jPolicy jand jMonetary jPolicy ........................................................................................ 11
Why jStudy jInternational jFinance? ................................................................... 12
The jForeign jExchange j Market ............................................................................................. 12
The jInternational jFinancial jSystem ...................................................................................... 14
How jWe jWill jStudy jMoney, jBanking, jand jFinancial jMarkets ................................. 14
Exploring j the j Web ................................................................................................................ 15
Concluding j Remarks ................................................................................... 15
Summary j 15 j • j Key jTerms j 16 j • j Questions j 16 j • j Applied
jProblems j 17 j • jData jAnalysis jProblems j 17 j • j Web jExercises j 18
j • j Web jReferences j 18
APPENDIX j TO j CHAPTER j 1
Defining jAggregate jOutput, jIncome, jthe jPrice
jLevel, jand jthe jInflation jRate 19
Aggregate jOutput jand jIncome ...................................................................... 19
Real jVersus jNominal jMagnitudes ..................................................................... 19
Aggregate jPrice jLevel.................................................................................... 20
Growth jRates jand jthe jInflation jRate ................................................................ 21
CHAPTER j 2
An jOverview jof jthe jFinancial jSystem 22
Function jof jFinancial jMarkets .......................................................................... 22
Structure jof jFinancial jMarkets ......................................................................... 25
Debt jand jEquity jMarkets ..................................................................................................... 25
Primary jand jSecondary jMarkets ........................................................................................... 25
Exchanges jand jOver-the-Counter jMarkets ........................................................................... 26
Money jand jCapital jMarkets .................................................................................................. 27
ix
,x Contents j in j Detail
Financial jMarket jInstruments .......................................................................... 27
Money jMarket jInstruments.................................................................................................... 27
Following jthe jFinancial jNews j Money jMarket jRates 28
Capital jMarket jInstruments ................................................................................................... 29
Following jthe jFinancial jNews jCapital jMarket jInterest jRates 30
Internationalization jof jFinancial jMarkets............................................................ 31
Global j Are jU.S. jCapital jMarkets jLosing jTheir jEdge? 32
International jBond jMarket, jEurobonds, jand jEurocurrencies ............................................... 32
World jStock jMarkets ............................................................................................................ 33
Function j of j Financial j Intermediaries: j Indirect j Finance ......................................... 33
Following jthe jFinancial jNews j Foreign jStock jMarket jIndexes 34
Transaction jCosts ................................................................................................................... 34
Global j The jImportance jof jFinancial jIntermediaries jRelative jto jSecurities
jMarkets: jAn jInternational jComparison 35
Risk j Sharing .......................................................................................................................... 36
Asymmetric jInformation: jAdverse jSelection jand jMoral jHazard ......................................... 36
Economies jof jScope jand jConflicts jof jInterest .................................................................... 38
Types jof jFinancial jIntermediaries ..................................................................... 38
Depository jInstitutions ........................................................................................................... 38
Contractual jSavings jInstitutions ............................................................................................ 40
Investment j Intermediaries ..................................................................................................... 41
Regulation jof jthe jFinancial jSystem .................................................................. 42
Increasing jInformation jAvailable jto jInvestors ...................................................................... 42
Ensuring jthe jSoundness jof jFinancial jIntermediaries .......................................................... 43
Financial jRegulation jAbroad ................................................................................................. 45
Summary j 45 j • j Key jTerms j 46 j • j Questions j 46 j • j Applied
jProblems j 47 j • jData jAnalysis jProblems j 48 j • j Web jExercises j 48
j • j Web jReferences j 48
CHAPTER j 3
What jIs jMoney? 49
Meaning jof jMoney........................................................................................ 49
Functions jof jMoney ....................................................................................... 50
Medium jof jExchange ............................................................................................................. 50
Unit jof jAccount ..................................................................................................................... 51
Store jof jValue ........................................................................................................................ 52
Evolution jof jthe jPayments jSystem ................................................................... 53
Commodity j Money ............................................................................................................... 53
Fiat j Money ............................................................................................................................ 53
Checks .................................................................................................................................... 53
Electronic jPayment ................................................................................................................ 54
E-Money ................................................................................................................................. 54
FyI j Are jWe jHeaded jfor ja jCashless jSociety? 55
, Contents j in j Detail xi
APPLICATION j Will j Bitcoin j Become j the j Money j of j the j Future? ...........................55
Measuring jMoney ........................................................................................ 56
The jFederal jReserve’s jMonetary jAggregates ......................................................................... 56
Following jthe jFinancial jNews j The jMonetary jAggregates 57
FyI j Where jAre jAll jthe jU.S. jDollars?58
Summary j 59 j • j Key jTerms j 60 j • j Questions j 60 j • j Applied
jProblems j 61 j • jData jAnalysis jProblems j 62 j • j Web jExercises j 62
j • j Web jReferences j 62
PART 2 63
CHAPTER j 4
The jMeaning jof jInterest jRates 64
Measuring jInterest jRates ................................................................................ 64
Present jValue ......................................................................................................................... 64
APPLICATION j Simple j Present j Value ....................................................................... 66
APPLICATION j How j Much j Is j That j Jackpot j Worth?............................................. 66
Four jTypes jof jCredit jMarket jInstruments ............................................................................ 67
Yield jto jMaturity ................................................................................................................... 68
APPLICATION j Yield j to j Maturity j on j a j Simple j Loan .............................................. 68
APPLICATION j Yield jto jMaturity jand jthe jYearly jPayment jon ja jFixed-Payment jLoan . 70
APPLICATION j Yield j to j Maturity j and j Bond j Price j for j a j Coupon j Bond .............. 71
APPLICATION j Yield j to j Maturity j on j a j Perpetuity .................................................. 73
APPLICATION j Yield j to j Maturity j on j a j Discount j Bond ......................................... 74
The jDistinction jBetween jInterest jRates jand jReturns ........................................... 75
Maturity jand jthe jVolatility jof jBond jReturns: jInterest-Rate jRisk ......................................... 78
Summary................................................................................................................................. 79
The jDistinction jBetween jReal jand jNominal jInterest jRates .................................... 79
APPLICATION j Calculating j Real j Interest j Rates ...................................................... 80
Summary j 82 j • j Key jTerms j 82 j • j Questions j 82 j • j Applied
jProblems j 83 j • jData jAnalysis jProblems j 84 j • j Web jExercises j 84
j • j Web jReferences j 84
CHAPTER j 4 j WEB j APPENDIX
Measuring jInterest-Rate jRisk: jDuration
Go jto jthe jCompanion jWebsite, jhttp://www.pearsonhighered.com/mishkin
CHAPTER j 5
The jBehavior jof jInterest jRates 85
Determinants jof jAsset jDemand ....................................................................... 85
Wealth .................................................................................................................................... 86
Expected jReturns ................................................................................................................... 86
CHAPTER j 1
Why jStudy jMoney, jBanking, jand jFinancial jMarkets? 2
Why jStudy jFinancial jMarkets? .......................................................................... 2
The jBond jMarket jand jInterest jRates ...................................................................................... 3
The j Stock j Market ................................................................................................................... 3
Why jStudy jFinancial jInstitutions jand jBanking? ..................................................... 5
Structure jof jthe jFinancial jSystem........................................................................................... 6
Banks jand jOther jFinancial jInstitutions.................................................................................. 6
Financial j Innovation ................................................................................................................ 6
Financial j Crises ........................................................................................................................ 7
Why jStudy j Money jand j Monetary j Policy? .......................................................... 7
Money jand jBusiness jCycles..................................................................................................... 7
Money jand jInflation ................................................................................................................ 8
Money jand jInterest jRates...................................................................................................... 10
Conduct jof jMonetary jPolicy .................................................................................................. 10
Fiscal jPolicy jand jMonetary jPolicy ........................................................................................ 11
Why jStudy jInternational jFinance? ................................................................... 12
The jForeign jExchange j Market ............................................................................................. 12
The jInternational jFinancial jSystem ...................................................................................... 14
How jWe jWill jStudy jMoney, jBanking, jand jFinancial jMarkets ................................. 14
Exploring j the j Web ................................................................................................................ 15
Concluding j Remarks ................................................................................... 15
Summary j 15 j • j Key jTerms j 16 j • j Questions j 16 j • j Applied
jProblems j 17 j • jData jAnalysis jProblems j 17 j • j Web jExercises j 18
j • j Web jReferences j 18
APPENDIX j TO j CHAPTER j 1
Defining jAggregate jOutput, jIncome, jthe jPrice
jLevel, jand jthe jInflation jRate 19
Aggregate jOutput jand jIncome ...................................................................... 19
Real jVersus jNominal jMagnitudes ..................................................................... 19
Aggregate jPrice jLevel.................................................................................... 20
Growth jRates jand jthe jInflation jRate ................................................................ 21
CHAPTER j 2
An jOverview jof jthe jFinancial jSystem 22
Function jof jFinancial jMarkets .......................................................................... 22
Structure jof jFinancial jMarkets ......................................................................... 25
Debt jand jEquity jMarkets ..................................................................................................... 25
Primary jand jSecondary jMarkets ........................................................................................... 25
Exchanges jand jOver-the-Counter jMarkets ........................................................................... 26
Money jand jCapital jMarkets .................................................................................................. 27
ix
,x Contents j in j Detail
Financial jMarket jInstruments .......................................................................... 27
Money jMarket jInstruments.................................................................................................... 27
Following jthe jFinancial jNews j Money jMarket jRates 28
Capital jMarket jInstruments ................................................................................................... 29
Following jthe jFinancial jNews jCapital jMarket jInterest jRates 30
Internationalization jof jFinancial jMarkets............................................................ 31
Global j Are jU.S. jCapital jMarkets jLosing jTheir jEdge? 32
International jBond jMarket, jEurobonds, jand jEurocurrencies ............................................... 32
World jStock jMarkets ............................................................................................................ 33
Function j of j Financial j Intermediaries: j Indirect j Finance ......................................... 33
Following jthe jFinancial jNews j Foreign jStock jMarket jIndexes 34
Transaction jCosts ................................................................................................................... 34
Global j The jImportance jof jFinancial jIntermediaries jRelative jto jSecurities
jMarkets: jAn jInternational jComparison 35
Risk j Sharing .......................................................................................................................... 36
Asymmetric jInformation: jAdverse jSelection jand jMoral jHazard ......................................... 36
Economies jof jScope jand jConflicts jof jInterest .................................................................... 38
Types jof jFinancial jIntermediaries ..................................................................... 38
Depository jInstitutions ........................................................................................................... 38
Contractual jSavings jInstitutions ............................................................................................ 40
Investment j Intermediaries ..................................................................................................... 41
Regulation jof jthe jFinancial jSystem .................................................................. 42
Increasing jInformation jAvailable jto jInvestors ...................................................................... 42
Ensuring jthe jSoundness jof jFinancial jIntermediaries .......................................................... 43
Financial jRegulation jAbroad ................................................................................................. 45
Summary j 45 j • j Key jTerms j 46 j • j Questions j 46 j • j Applied
jProblems j 47 j • jData jAnalysis jProblems j 48 j • j Web jExercises j 48
j • j Web jReferences j 48
CHAPTER j 3
What jIs jMoney? 49
Meaning jof jMoney........................................................................................ 49
Functions jof jMoney ....................................................................................... 50
Medium jof jExchange ............................................................................................................. 50
Unit jof jAccount ..................................................................................................................... 51
Store jof jValue ........................................................................................................................ 52
Evolution jof jthe jPayments jSystem ................................................................... 53
Commodity j Money ............................................................................................................... 53
Fiat j Money ............................................................................................................................ 53
Checks .................................................................................................................................... 53
Electronic jPayment ................................................................................................................ 54
E-Money ................................................................................................................................. 54
FyI j Are jWe jHeaded jfor ja jCashless jSociety? 55
, Contents j in j Detail xi
APPLICATION j Will j Bitcoin j Become j the j Money j of j the j Future? ...........................55
Measuring jMoney ........................................................................................ 56
The jFederal jReserve’s jMonetary jAggregates ......................................................................... 56
Following jthe jFinancial jNews j The jMonetary jAggregates 57
FyI j Where jAre jAll jthe jU.S. jDollars?58
Summary j 59 j • j Key jTerms j 60 j • j Questions j 60 j • j Applied
jProblems j 61 j • jData jAnalysis jProblems j 62 j • j Web jExercises j 62
j • j Web jReferences j 62
PART 2 63
CHAPTER j 4
The jMeaning jof jInterest jRates 64
Measuring jInterest jRates ................................................................................ 64
Present jValue ......................................................................................................................... 64
APPLICATION j Simple j Present j Value ....................................................................... 66
APPLICATION j How j Much j Is j That j Jackpot j Worth?............................................. 66
Four jTypes jof jCredit jMarket jInstruments ............................................................................ 67
Yield jto jMaturity ................................................................................................................... 68
APPLICATION j Yield j to j Maturity j on j a j Simple j Loan .............................................. 68
APPLICATION j Yield jto jMaturity jand jthe jYearly jPayment jon ja jFixed-Payment jLoan . 70
APPLICATION j Yield j to j Maturity j and j Bond j Price j for j a j Coupon j Bond .............. 71
APPLICATION j Yield j to j Maturity j on j a j Perpetuity .................................................. 73
APPLICATION j Yield j to j Maturity j on j a j Discount j Bond ......................................... 74
The jDistinction jBetween jInterest jRates jand jReturns ........................................... 75
Maturity jand jthe jVolatility jof jBond jReturns: jInterest-Rate jRisk ......................................... 78
Summary................................................................................................................................. 79
The jDistinction jBetween jReal jand jNominal jInterest jRates .................................... 79
APPLICATION j Calculating j Real j Interest j Rates ...................................................... 80
Summary j 82 j • j Key jTerms j 82 j • j Questions j 82 j • j Applied
jProblems j 83 j • jData jAnalysis jProblems j 84 j • j Web jExercises j 84
j • j Web jReferences j 84
CHAPTER j 4 j WEB j APPENDIX
Measuring jInterest-Rate jRisk: jDuration
Go jto jthe jCompanion jWebsite, jhttp://www.pearsonhighered.com/mishkin
CHAPTER j 5
The jBehavior jof jInterest jRates 85
Determinants jof jAsset jDemand ....................................................................... 85
Wealth .................................................................................................................................... 86
Expected jReturns ................................................................................................................... 86
