Full file at

Contents

Preface ...... v

Alternative Course Outlines...... vii

Ancillary Items for Financial Markets and Institutions, Seventh Edition...... xi

Part IIntroduction...... 1

Chapter 1Why Study Financial Markets and Institutions?...... 2

Chapter 2Overview of the Financial System...... 5

Part IIFundamentals of Financial Markets...... 9

Chapter 3What Do Interest Rates Mean and What Is Their Role in Valuation?...... 10

Chapter 4Why Do Interest Rates Change?...... 16

Chapter 5How Do Risk and Term Structure Affect Interest Rates?...... 23

Chapter 6Are Financial Markets Efficient?...... 29

Part IIIFundamentals of Financial Institutions...... 33

Chapter 7Why Do Financial Institutions Exist?...... 34

Chapter 8Why Do Financial Crises Occur and Why Are They
So Damaging to the Economy?...... 40

Part IVCentral Banking and the Conduct of Monetary Policy...... 45

Chapter 9Central Banks and the Federal Reserve System...... 46

Chapter 10Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics...... 50

Part VFinancial Markets...... 57

Chapter 11The Money Markets...... 58

Chapter 12The Bond Market...... 63

Chapter 13The Stock Market...... 69

Chapter 14The Mortgage Markets...... 75

Chapter 15The Foreign Exchange Market...... 86

Chapter 16The International Financial System...... 92

Part VIThe Financial Institutions Industry...... 97

Chapter 17Banking and the Management of Financial Institutions...... 98

Chapter 18Financial Regulation...... 106

Chapter 19Banking Industry: Structure and Competition...... 114

Chapter 20The Mutual Fund Industry...... 117

Chapter 21Insurance Companies and Pension Funds...... 123

Chapter 22Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms...... 128

Part VIIThe Management of Financial Institutions...... 133

Chapter 23Risk Management in Financial Institutions...... 134

Chapter 24Hedging with Financial Derivatives...... 143

Chapters on the Web

Chapter 25Savings Associations and Credit Unions...... 152

Chapter 26Finance Companies...... 155

Solutions to Online Integrative Mini-Cases...... 157

Solutions to Online Mini-Cases...... 163

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

1 Contents

Preface

The demands for good teaching at business schools seem to us to have increased dramatically in recent years. In order to aid busy instructors in this demanding environment, we have worked hard to make this Instructor’s Manual a valuable teaching aid that will help reduce class preparation time.

The Instructor’s Manual is organized by chapter. Each chapter is broken into sections: Chapter Outline, Overview and Teaching Tips (things we have found useful in the classroom), and Answers to End-of-Chapter Questions and Problems. Before the chapter breakdown, and following this preface, are pedagogical suggestions on such topics as how to organize the course and make use of the ancillaries, as well as solutions to the mini-cases on the text’s Companion Website at To obtain access to other instructor resources associated with this textbook, please visit the Instructor’s Resource Center Online at

PLEASE NOTE THAT INSTRUCTORS HAVE PERMISSION TO DUPLICATE ANY OF THE MATERIALS IN THIS INSTRUCTOR’S MANUAL FOR CLASSROOM USE.

While we believe that this Instructor’s Manual will be an extremely valuable tool in teaching the financial markets and institutions course, we would also appreciate any suggestions or comments for improving this supplement. Please direct all correspondence to us at the addresses below.

Frederic S. Mishkin / Stanley G. Eakins
Graduate School of Business / Department of Finance—School of Business
Uris Hall 817 / 3240 Bate Building
Columbia University / East Carolina State University
New York, NY 10027 / Greenville, NC 27858-4343
Frederic S. Mishkin / Stanley G. Eakins
New York, New York / Greenville, North Carolina

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

1 Contents

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

Alternative Course Outlines 1

Alternative Course Outlines

There are many different ways to teach a course on financial markets and institutions. For this reason,
the material in Financial Markets and Institutions has been arranged with flexibility in mind so that many teaching styles can be accommodated. The following section suggests sample outlines for four main approaches to teaching financial markets and institutions that show how the text can be adapted to each approach and to teaching schedules. Note, however, that many variations on these outlines are possible.

 Outline for Basic Financial Markets
and Institutions Course

Core Chapters

1Why Study Financial Markets and Institutions?

2Overview of the Financial System

3What Do Interest Rates Mean and What Is Their Role in Valuation?

4Why Do Interest Rates Change?

5How Do Risk and Term Structure Affect Interest Rates?

7Why Do Financial Institutions Exist?

8Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?

11The Money Markets

12The Bond Market

13The Stock Market

17Banking and the Management of Financial Institutions

18Financial Regulation

19Banking Industry: Structure and Competition

For a one-semester course, cover any five of the following optional chapters:

9Central Banks and the Federal Reserve System

10Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

14The Mortgage Markets

15The Foreign Exchange Market

16The International Financial System

20The Mutual Fund Industry

21Insurance Companies and Pension Funds

22Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

23Risk Management in Financial Institutions

24Hedging with Financial Derivatives

25On the Web: Savings Associations and Credit Unions

26On the Web: Finance Companies

A one-quarter course would probably only include two or three of the optional chapters.

 Outline for Financial Markets and Institutions
Course with an International Focus

Core Chapters

1Why Study Financial Markets and Institutions?

2Overview of the Financial System

3What Do Interest Rates Mean and What Is Their Role in Valuation?

4Why Do Interest Rates Change?

5How Do Risk and Term Structure Affect Interest Rates?

7Why Do Financial Institutions Exist?

8Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?

11The Money Markets

12The Bond Market

13The Stock Market

15The Foreign Exchange Market

16The International Financial System

17Banking and the Management of Financial Institutions

18Financial Regulation

19Banking Industry: Structure and Competition

For a one-semester course, cover any three of the following optional chapters:

9Central Banks and the Federal Reserve System

10Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

14The Mortgage Markets

20The Mutual Fund Industry

21Insurance Companies and Pension Funds

22Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

23Risk Management in Financial Institutions

24Hedging with Financial Derivatives

25On the Web: Savings Associations and Credit Unions

26On the Web: Finance Companies

A one-quarter course would probably only include one of the optional chapters.

 Outline for Financial Markets and Institutions Course
with a Managerial Emphasis

Core Chapters

1Why Study Financial Markets and Institutions?

2Overview of the Financial System

3What Do Interest Rates Mean and What Is Their Role in Valuation?

4Why Do Interest Rates Change?

5How Do Risk and Term Structure Affect Interest Rates?

17Banking and the Management of Financial Institutions

19Banking Industry: Structure and Competition

23Risk Management in Financial Institutions

24Hedging with Financial Derivatives

For a one-semester course, cover any eight of the following optional chapters:

7Why Do Financial Institutions Exist?

8Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?

9Central Banks and the Federal Reserve System

10Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

11The Money Markets

12The Bond Market

13The Stock Market

14The Mortgage Markets

15The Foreign Exchange Market

16The International Financial System

18Financial Regulation

20The Mutual Fund Industry

21Insurance Companies and Pension Funds

22Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

25On the Web: Savings Associations and Credit Unions

26On the Web: Finance Companies

A one-quarter course would probably include four or five of the optional chapters.

 Outline for Financial Markets and Institutions Course
with a Public Policy Emphasis

Core Chapters

1Why Study Financial Markets and Institutions?

2Overview of the Financial System

3What Do Interest Rates Mean and What Is Their Role in Valuation?

4Why Do Interest Rates Change?

5How Do Risk and Term Structure Affect Interest Rates?

7Why Do Financial Institutions Exist?

8Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?

9Central Banks and the Federal Reserve System

10Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

17Banking and the Management of Financial Institutions

18Financial Regulation

For a one-semester course, cover any seven of the following optional chapters:

11The Money Markets

12The Bond Market

13The Stock Market

14The Mortgage Markets

15The Foreign Exchange Market

16The International Financial System

19Banking Industry: Structure and Competition

20The Mutual Fund Industry

21Insurance Companies and Pension Funds

22Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

23Risk Management in Financial Institutions

24Hedging with Financial Derivatives

25On the Web: Savings Associations and Credit Unions

26On the Web: Finance Companies

A one-quarter course would probably only include four or five of the optional chapters.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

Ancillary Items for Financial Markets and Institutions, Seventh Edition 1

Ancillary Items for Financial Markets
and Institutions, Seventh Edition

You may access all ancillary items at the Instructor’s Resource Center Online at

 Chapter Outlines

The chapter outlines, containing all the headings from each chapter, are a handy reference tool. Instructors may wish to print them out from the Instructor’s Manual files in order to hand them out to students before class, so that students will be able to follow the flow of the lecture. The chapter outlines may also be used to make transparency masters, which can be shown at the beginning of class to outline the lecture and motivate the students.

 Overviews of the Chapters and Teaching Tips

We have been teaching financial markets and institutions for over ten years. The overviews and teaching tips for each chapter in the next part of the Instructor’s Manual are intended to share some of our experiences with teaching the material in the textbook. Each of these sections lists a brief description of the contents of the chapter, discusses the chapter’s novel features and central points to impart to students, suggests tips for teaching the chapter that we have found useful in our classes, and provides guidance as to what material can easily be skipped in each chapter.

 Answers and Solutions to End-of-Chapter Questions
and Quantitative Problems

The Instructor’s Manual also contains the answers to all the end-of-chapter questions and quantitativeproblems. Please note that for those questions that require students to look up current data, no answers are provided. Some instructors may want to use the end-of-chapter questions and problems in the book for homework assignments. I have found it useful to hand out photocopies of the answers to the questions provided in this section to the students as solution sets after they have completed their assignments; they
find them to be an invaluable study aid. The solution sets may also be printed from the Wordfiles on the Instructor’s Resource Center Online.

 PowerPoints

A set of PowerPoints is available, which contains lecture notes, and the complete set of figures and tables for the textbook. This set of PowerPoints is comprehensive and outlines the major points covered in
the text. The lecture notes have been class-tested successfully in our own classes, and we hope that other instructors will find them just as useful a class-preparation tool as we have. Some instructors might use these PowerPoints as their own class notes, but prefer to teach with a blackboard. As with the chapter outlines, these PowerPoints may also be printed for student handouts.

 Companion Website

The Companion Website for the textbook, located at features Web chapters on saving associations and credit unions and another on finance companies, Web appendices, mini-cases, animated figures, and links to relevant data sources and Federal Reserve Websites.

 Test Bank

The Test Bank, prepared by John Banko of the University of Florida, contains multiple-choice questions, true/false questions, and short essay questions that are appropriate for use as quiz or test questions. It is available as a set of Microsoft Word or PDF files. All of the questions from the Test Item File are also available in computerized format for use in the TestGen software. The TestGen software is available for both Windows and Macintosh systems.

 Study Guide

The only way to effectively learn about financial markets and institutions is by continual, and active, application of the basic concepts developed in the textbook. To help the student in this endeavor, William Gerken of Auburn University has revised a Study Guide to accompany the Seventh Edition, which contains the following elements for each chapter:

Chapter Learning Goals

  • Chapter Summary

Exercises give the students practice with using the concepts in the text by asking them to complete matching exercises and essay questions.

Self-Test consists of fill-in-the-blank, true/false, multiple-choice, short-answer, and problems.

Answers to the exercises and self-test are provided for each chapter.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

Ancillary Items for Financial Markets and Institutions, Seventh Edition 1

© 2012 Pearson Education, Inc. Publishing as Prentice Hall