Financial Markets and Institutions Global 7th Edition Mishkin Test Bank

Financial Markets and Institutions Global 7th Edition Mishkin Test Bank

Product details:

• ISBN-10 ‏ : ‎ 0273754440
• ISBN-13 ‏ : ‎ 978-0273754442
• Author: Frederic Mishkin

In Financial Markets and Institutions, best-selling authors Mishkin and Eakins provide a practical introduction to prepare students for today’s changing landscape of financial markets and institutions. A unifying framework uses a few core principles to organize students’ thinking then examines the models as real-world scenarios from a practitioner’s perspective. By analyzing these applications, students develop the critical-thinking and problem-solving skills necessary to respond to challenging situations in their future careers. This title is a Pearson Global Edition. The Editorial team at Pearson has worked closely with educators around the world to include content which is especially relevant to students outside the United States.

Table contents:

part 1 INTRODUCTION AND OVERVIEW
OF FINANCIAL MARKETS 1
1 Introduction 2
WHY STUDY FINANCIAL MARKETS 
AND INSTITUTIONS? CHAPTER 
OVERVIEW 2 
OVERVIEW OF FINANCIAL MARKETS 4
Primary Markets versus Secondary 
Markets 4 
Money Markets versus Capital Markets 7 
Foreign Exchange Markets 9 
Derivative Security Markets 10 
Financial Market Regulation 10
OVERVIEW OF FINANCIAL 
INSTITUTIONS 11
Unique Economic Functions Performed by 
Financial Institutions 14 
Additional Benefits FIs Provide to Suppliers 
of Funds 16 
Economic Functions FIs Provide to the 
Financial System as a Whole 17 
Risks Incurred by Financial 
Institutions 18 
Regulation of Financial Institutions 19
GLOBALIZATION OF FINANCIAL 
MARKETS AND INSTITUTIONS 20 
2 Determinants of Interest Rates 26
Interest Rate Fundamentals: 
Chapter Overview 26 
Time Value of Money and Interest Rates 28
Time Value of Money 29 
Lump Sum Valuation 31 
Annuity Valuation 35 
Effective Annual Return 37
Loanable Funds Theory 37
Supply of Loanable Funds 38 
Demand for Loanable Funds 40 
Equilibrium Interest Rate 40 
Factors that Cause the Supply and Demand 
Curves for Loanable Funds to Shift 42
Movement of Interest Rates over Time 45
Determinants of Interest Rates for Individual 
Securities 45
Inflation 46 
Real Interest Rates 46 
Default or Credit Risk 47 
Liquidity Risk 48 
Special Provisions or Covenants 49 
Term to Maturity 50
Term Structure of Interest Rates 52
Unbiased Expectations Theory 52 
Liquidity Premium Theory 54 
Market Segmentation Theory 55
Forecasting Interest Rates 55 
Appendix 2A: Construction of a Yield 
Curve Using the Liquidity Premium Theory 
of the Term Structure of Interest Rates 
(at www.mhhe.com/sc3e) 
3 Interest Rates and Security
Valuation 61
Interest Rates as a Determinant of Financial 
Security Values: Chapter Overview 61 
Various Interest Rate Measures 62
Coupon Rate 62 
Required Rate of Return 62 
Expected Rate of Return 63 
Required versus Expected Rates of Return: 
The Role of Efficient Markets 65 
Realized Rate of Return 65
Bond Valuation 66
Formula Used to Calculate Fair Present 
Values 66 
Formula Used to Calculate Yield 
to Maturity 68
Impact of Interest Rate Changes on Security 
Values 69 
Impact of Maturity on Security Values 71
Maturity and Security Prices 71 
Maturity and Security Price Sensitivity to 
Changes in Interest Rates 72
Impact of Coupon Rates on SecurityValues 73
Coupon Rate and Security Prices 73 
Coupon Rate and Security Price Sensitivity to 
Changes in Interest Rates 73
Duration 74 
A Simple Illustration of Duration 75 
A General Formula for Duration 77 
Features of Duration 80 
Economic Meaning of Duration 81 
Large Interest Rate Changes and Duration 83
Appendix 3A: Equity Valuation 
(at www.mhhe.com/sc3e)
Appendix 3B: Duration and Immunization 
(at www.mhhe.com/sc3e) 
Appendix 3C: More on Convexity 
(at www.mhhe.com/sc3e) 
4 The Federal Reserve System,
Monetary Policy, and Interest 
Rates 90
Major Duties and Responsibilities of the Federal 
Reserve System: Chapter Overview 90 
Structure of the Federal Reserve System 91
Organization of the Federal Reserve 
System 91 
Board of Governors of the Federal Reserve 
System 92 
Federal Open Market Committee 93 
Functions Performed by Federal Reserve 
Banks 94 
Balance Sheet of the Federal Reserve 98
Monetary Policy Tools 101
Open Market Operations 102 
The Discount Rate 104 
Reserve Requirements (Reserve Ratios) 106
The Federal Reserve, the Money Supply, and 
Interest Rates 110
Effects of Monetary Tools on Various 
Economic Variables 110 
Money Supply versus Interest Rate 
Targeting 112
International Monetary Policies and 
Strategies 115
Impact of U.S. Monetary Policy on Foreign 
Exchange Rates 115 
Challenges of Other Major Central Banks 117
par t 2 SECURITIES MARKETS 121
5 Money Markets 122
Definition of Money Markets: Chapter 
Overview 122 
Money Markets 123 
Yields on Money Market Securities 124
Effective Annual Return 124 
Discount Yields 124 
Single-Payment Yields 125
Money Market Securities 126
Treasury Bills 126 
Federal Funds 133
Repurchase Agreements 135 
Commercial Paper 138 
Negotiable Certificates of Deposits 141 
Banker?s Acceptances 143 
Comparison of Money Market 
Securities 143
Money Market Participants 144 
The U.S. Treasury 144 
The Federal Reserve 144 
Commercial Banks 145 
Money Market Mutual Funds 145 
Brokers and Dealers 145 
Corporations 146 
Other Financial Institutions 146
International Aspects of Money Markets 146 
Appendix 5A: Single versus 
Discriminating Price Treasury Auctions 
(at www.mhhe.com/sc3e)
Appendix 5B: Creation of a Banker?s 
Acceptance 
(at www.mhhe.com/sc3e) 
6 Bond Markets 154
Definition of Bond Markets: Chapter 
Overview 154 
Bond Market Securities 155
Treasury Notes and Bonds 155 
Municipal Bonds 169 
Corporate Bonds 174 
Bond Ratings 180 
Bond Market Indexes 182
Bond Market Participants 183 
Comparison of Bond Market 
Securities 183 
International Aspects of Bond Markets 184 
Eurobonds, Foreign Bonds, and Brady and 
Sovereign Bonds 187
Eurobonds 187 
Foreign Bonds 188 
Brady Bonds and Sovereign Bonds 188 
7 Mortgage Markets 192
Mortgages and Mortgage-Backed Securities: 
Chapter Overview 192 
Primary Mortgage Market 194
Mortgage Characteristics 194 
Mortgage Amortization 200 
Other Types of Mortgages 205
Secondary Mortgage Markets 207
History and Background of Secondary 
Mortgage Markets 207 
Mortgage Sales 208 
Mortgage-Backed Securities 208
Participants in the Mortgage Markets 214
International Trends in Securitization 216
Demand by International Investors for U.S. 
Mortgage-Backed Securities 216 
International Mortgage Securitization 216
8 Foreign Exchange Markets 220
Foreign Exchange Markets and Risk: Chapter 
Overview 220 
Background and History of Foreign Exchange 
Markets 221 
Foreign Exchange Rates and Transactions 223
Foreign Exchange Rates 223 
Foreign Exchange Transactions 224 
Return and Risk of Foreign Exchange 
Transactions 227 
Role of Financial Institutions in Foreign 
Exchange Transactions 232
Interaction of Interest Rates, Inflation, and 
Exchange Rates 236
Purchasing Power Parity 237 
Interest Rate Parity 239
Appendix 8A: Balance of Payment 
Accounts 
9 Stock Markets 244
The Stock Markets: Chapter Overview 244 
Stock Market Securities 246
Common Stock 247 
Preferred Stock 251
Primary and Secondary Stock Markets 252
Primary Markets 252 
Secondary Markets 257 
Stock Market Indexes 267
Stock Market Participants 271 
Other Issues Pertaining to Stock Markets 272
Economic Indicators 272 
Market Efficiency 274 
Stock Market Regulations 276
International Aspects of Stock Markets 278 
Appendix 9A: The Capital Asset Pricing 
Model 
(at www.mhhe.com/sc3e) 
Appendix 9B: Event Study Tests 
(at www.mhhe.com/sc3e)
10 Derivative Securities Markets 284
Derivative Securities: Chapter Overview 284 
Forwards and Futures 285
Spot Markets 286 
Forward Markets 286 
Futures Markets 287
Options 295
Call Options 295 
Put Options 297 
Option Values 299
Option Markets 301
Regulation of Futures and Options 
Markets 307 
Swaps 307
Interest Rate Swaps 308 
Currency Swaps 311 
Swap Markets 312
Caps, Floors, and Collars 313 
International Aspects of Derivative Securities 
Markets 315 
Appendix 10A: Black?Scholes Option 
Pricing Model 
(at www.mhhe.com/sc3e) 
part 3 COMMERCIAL BANKS 319
11 Commercial Banks: Industry
Overview 320
Commercial Banks as a Sector of the Financial 
Institutions Industry: Chapter Overview 320 
Definition of a Commercial Bank 322 
Balance Sheets and Recent Trends 322
Assets 322 
Liabilities 324 
Equity 326 
Off-Balance-Sheet Activities 326 
Other Fee-Generating Activities 329
Size, Structure, and Composition of the 
Industry 330
Economies of Scale and Scope 331 
Bank Size and Concentration 334 
Bank Size and Activities 335
Industry Performance 336 
Technology in Commercial Banking 338
Wholesale Banking Services 338 
Retail Banking Services 339
Regulators 341
Federal Deposit Insurance Corporation 341 
Office of the Comptroller of the Currency 341 
Federal Reserve System 342 
State Authorities 343
Global Issues 343
Advantages and Disadvantages of 
International Expansion 343 
Global Banking Performance 345 
12 Commercial Banks? Financial
Statements and Analysis 349
Why Evaluate the Performance of Commercial 
Banks? Chapter Overview 349 
Financial Statements of Commercial 
Banks 351
Balance Sheet Structure 352 
Off-Balance-Sheet Assets and Liabilities 358
Other Fee-Generating Activities 363 
Income Statement 364 
Direct Relationship between the Income 
Statement and the Balance Sheet 367
Financial Statement Analysis Using a Return 
on Equity Framework 368
Return on Equity and Its Components 370 
Return on Assets and Its Components 371 
Other Ratios 374
Impact of Market Niche and Bank Size on 
Financial Statement Analysis 377
Impact of a Bank?s Market Niche 377 
Impact of Size on Financial Statement 
Analysis 378 
13 Regulation of Commercial
Banks 382
Specialness and Regulation: Chapter 
Overview 382 
Types of Regulations and the Regulators 383
Safety and Soundness Regulation 383 
Monetary Policy Regulation 385 
Credit Allocation Regulation 385 
Consumer Protection Regulation 385 
Investor Protection Regulation 386 
Entry and Chartering Regulation 386 
Regulators 387
Regulation of Product and Geographic 
Expansion 387
Product Segmentation in the U.S. Commercial 
Banking Industry 387 
Geographic Expansion in the U.S. 
Commercial Banking Industry 392
Bank and Savings Institution Guarantee 
Funds 393
FDIC 393 
The Demise of the Federal Savings and Loan 
Insurance Corporation (FSLIC) and the 
FDIC 394 
Reform of Deposit Insurance 395 
Non-U.S. Deposit Insurance 
Systems 397
Balance Sheet Regulations 398
Regulations on Commercial Bank 
Liquidity 398 
Regulations on Capital Adequacy 
(Leverage) 398 
Off-Balance-Sheet Regulations 404
Foreign versus Domestic Regulation of 
Commercial Banks 404
Product Diversification Activities 404 
Global or International Expansion 
Activities 404
Appendix 13A: Commercial Banks 
and Their Regulators 
(at www.mhhe.com/sc3e)
Appendix 13B: Proposed Changes to the 
FDIC?s Deposit Insurance Premium 
Assessments 
(at www.mhhe.com/sc3e) 
Appendix 13C: Calculating Minimum 
Required Reserves at U.S. Commercial 
Banks 
(at www.mhhe.com/sc3e) 
Appendix 13D: Calculating Risk-Based 
Capital Ratios 
(at www.mhhe.com/sc3e)
par t 4 OTHER FINANCIAL
INSTITUTIONS 413
14 Other Lending Institutions 414
Other Lending Institutions: Chapter 
Overview 414 
Savings Associations 416
Size, Structure, and Composition of the 
Industry 416 
Balance Sheets and Recent Trends 419
Savings Banks 422
Size, Structure, and Composition of the 
Industry 422 
Balance Sheets and Recent Trends 423
Regulators of Savings Institutions 423 
Savings Association and Savings Bank Recent 
Performance 423 
Credit Unions 425
Size, Structure, and Composition of the 
Industry 426 
Balance Sheets and Recent Trends 428 
Regulators 430 
Industry Performance 431
Finance Companies 431
Size, Structure, and Composition of the 
Industry 431 
Balance Sheets and Recent Trends 433 
Industry Performance 438 
Regulation 439
Global Issues 439
15 Insurance Companies 442
Two Categories of Insurance Companies: 
Chapter Overview 442 
Life Insurance Companies 443
Size, Structure, and Composition of the 
Industry 443 
Balance Sheets and Recent Trends 447 
Regulation 449
Property?Casualty Insurance Companies 451 
Size, Structure, and Composition of the 
Industry 451
Balance Sheets and Recent Trends 453 
Regulation 460
Global Issues 461
16 Securities Firms and Investment
Banks 465
Services Offered by Securities Firms versus 
Investment Banks: Chapter Overview 465 
Size, Structure, and Composition of the 
Industry 467 
Securities Firm and Investment Bank Activity 
Areas 469
Investing 469 
Investment Banking 469 
Market Making 470 
Trading 471 
Cash Management 473 
Mergers and Acquisitions 473 
Other Service Functions 473
Recent Trends and Balance Sheets 474
Recent Trends 474 
Balance Sheet 477
Regulation 479 
Global Issues 482
17 Mutual Funds 486
Mutual Funds: Chapter Overview 486 
Size, Structure, and Composition of the 
Industry 487
Historical Trends 487 
Different Types of Mutual Funds 489 
Mutual Fund Prospectuses and 
Objectives 494 
Investor Returns from Mutual Fund 
Ownership 495 
Mutual Fund Costs 497 
Mutual Fund Share Quotes 500
Balance Sheets and Recent Trends 501
Long-Term Funds 501 
Money Market Funds 502
Regulation 503 
Global Issues 507 
Appendix17A: Hedge Funds 
(at www.mhhe.com/sc3e) 
18 Pension Funds 511
Pension Funds Defined: Chapter 
Overview 511 
Size, Structure, and Composition of the 
Industry 512
Insured versus Noninsured Pension Funds 512 
Defined Benefit versus Defined Contribution 
Pension Funds 513 
Private Pension Funds 515 
Public Pension Funds 522
Financial Asset Investments and Recent 
Trends 523
Private Pension Funds 523 
Public Pension Funds 524
Regulation 526 
Global Issues 528
par t 5 RISK MANAGEMENT IN
FINANCIAL INSTITUTIONS 533
19 Types of Risks Incurred by
Financial Institutions 534
Why Financial Institutions Need to Manage 
Risk: Chapter Overview 534 
Credit Risk 535 
Liquidity Risk 538 
Interest Rate Risk 540 
Market Risk 542 
Off-Balance-Sheet Risk 543 
Foreign Exchange Risk 545 
Country or Sovereign Risk 547 
Technology and Operational Risk 548 
Insolvency Risk 550 
Other Risks and Interaction among 
Risks 550
20 Managing Credit Risk on the
Balance Sheet 554
Credit Risk Management: Chapter 
Overview 554 
Credit Analysis 558
Real Estate Lending 558 
Consumer (Individual) and Small-Business 
Lending 562 
Mid-Market Commercial and Industrial 
Lending 562 
Large Commercial and Industrial 
Lending 569
Calculating the Return on a Loan 572 
Return on Assets (ROA) 573 
RAROC Models 575
Appendix 20A: Loan Portfolio Risk and 
Management 
(at www.mhhe.com/sc3e) 
21 Managing Liquidity Risk on the
Balance Sheet 580
Liquidity Risk Management: Chapter 
Overview 580 
Causes of Liquidity Risk 580 
Liquidity Risk and Depository 
Institutions 582
Liability Side Liquidity Risk 582 
Asset Side Liquidity Risk 586 
Measuring a Bank?s Liquidity Exposure 586 
Liquidity Risk, Unexpected Deposit Drains, 
and Bank Runs 593 
Bank Runs, the Discount Window, and 
Deposit Insurance 594
Liquidity Risk and Insurance Companies 597
Life Insurance Companies 597 
Property?Casualty Insurance Companies 598 
Guarantee Programs for Life and 
Property?Casualty Insurance Companies 598
Liquidity Risk and Mutual Funds 599
22 Managing Interest Rate Risk 
and Insolvency Risk on the Balance 
Sheet 603
Interest Rate and Insolvency Risk 
Management: Chapter Overview 603 
Interest Rate Risk Measurementand 
Management 605
Repricing Model 605 
Duration Model 612
Insolvency Risk Management 619
Capital and Insolvency Risk 620 
23 Managing Risk with Derivative
Securities 629
Derivative Securities Used to Manage Risk: 
Chapter Overview 629 
Forward and Futures Contracts 629
Hedging with Forward Contracts 630 
Hedging with Futures Contracts 632
Options 635
Basic Features of Options 636 
Actual Interest Rate Options 639 
Hedging with Options 639 
Caps, Floors, and Collars 640
Risks Associated with Futures, Forwards, and 
Options 641
Swaps 642
Hedging with Interest Rate Swaps 642 
Currency Swaps 645 
Credit Risk Concerns with Swaps 646
Comparison of Hedging Methods 647
Writing versus Buying Options 647 
Futures versus Options Hedging 649 
Swaps versus Forwards, Futures, and 
Options 650 
Derivative Trading Policies of Regulators 650
Appendix 23A: Hedging with Futures 
Contracts 
(at www.mhhe.com/sc3e) 
Appendix 23B: Hedging with Options 
(at www.mhhe.com/sc3e) 
Appendix 23C: Hedging with Caps, 
Floors, and Collars 
(at www.mhhe.com/sc3e) 
24 Managing Risk with Loan Sales and
Securitization 655
Why Financial Institutions Sell and Securitize 
Loans: Chapter Overview 655 
Loan Sales 656
Types of Loan Sales Contracts 658 
The Loan Sale Market 659 
Secondary Market for Less Developed 
Country Debt 662 
Factors Encouraging Future Loan Sales 
Growth 662 
Factors Deterring Future Loan Sales 
Growth 663
Loan Securitization 664
Pass-Through Security 664 
Collateralized Mortgage Obligation 670 
Mortgage-Backed Bond 677
Securitization of Other Assets 678 
Can All Assets Be Securitized? 679
References 682
Index 684

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