Licensed to: Licensed to: Financial Markets and Institutions ABRIDGED 9TH EDITION J E F F M A D U R A Florida Atlantic University Australia(cid:129)Brazil(cid:129)Japan(cid:129)Korea(cid:129)Mexico(cid:129)Singapore(cid:129)Spain(cid:129)UnitedKingdom(cid:129)UnitedStates Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Licensed to: This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. 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Foryourcourseandlearningsolutions,visitacademic.cengage.com Purchaseanyofourproductsatyourlocalcollegestoreoratourpreferred onlinestorewww.cengagebrain.com Printed in the United States of America 1 2 3 4 5 6 7 14 13 12 11 10 Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Licensed to: This text is dedicated to Best Friends Animal Sanctuary in Kanab, Utah, for its commitment to, compassion for, and care of more than 1,500 animals, many of which were previously homeless. Most of the royalties the author receives from this text will be invested in an estate that will ultimately be donated to Best Friends. Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Licensed to: Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Licensed to: Brief Contents PART 1: Overview of the Financial Environment 1 1 Role of Financial Markets and Institutions, 3 2 Determination of Interest Rates, 29 3 Structure of Interest Rates, 49 PART 2:The Fed and Monetary Policy 79 4 Functions of the Fed, 81 5 Monetary Policy, 99 PART 3:Debt Security Markets 123 6 Money Markets, 125 7 Bond Markets, 149 8 Bond Valuation and Risk, 173 9 Mortgage Markets, 205 PART 4:Equity Markets 227 10 Stock Offerings and Investor Monitoring, 229 11 Stock Valuation and Risk This chapter is made available to you at www.cengage.com/finance/madura. 12 Market Microstructure and Strategies This chapter is made available to you at www.cengage.com/finance/madura. PART 5:Derivative Security Markets 323 13 Financial Futures Markets, 325 14 Options Markets This chapter is made available to you at www.cengage.com/finance/madura. 15 Swap Markets This chapter is made available to you at www.cengage.com/finance/madura. 16 Foreign Exchange Derivative Markets This chapter is made available to you at www.cengage.com/finance/madura. PART 6:Commercial Banking 459 17 Commercial Bank Operations, 461 18 Bank Regulation, 481 19 Bank Management, 499 20 Bank Performance, 527 PART 7: Nonbank Operations 543 21 Thrift Operations This chapter is made available to you at www.cengage.com/finance/madura. 22 Finance Operations This chapter is made available to you at www.cengage.com/finance/madura. v Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Licensed to: vi BriefContents 23 Mutual Fund Operations, 579 24 Securities Operations This chapter is made available to you at www.cengage.com/finance/madura. 25 Insurance and Pension Fund Operations This chapter is made available to you at www.cengage.com/finance/madura. Appendix A: Comprehensive Project, 677 Appendix B: Using Excel to Conduct Analyses, 687 Glossary, 691 Index, 705 Credit Crisis Timeline, 716 Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. 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Licensed to: Contents From the Publisher, xxi Preface, xxiii About the Author, xxix PART 1: Overview of the Financial Environment 1 1: ROLEOFFINANCIALMARKETSANDINSTITUTIONS 3 Roleof FinancialMarkets, 3 TypesofFinancialMarkets, 4 HowFinancial MarketsFacilitateCorporate Finance,5 SecuritiesTraded inFinancial Markets,6 MoneyMarketSecurities, 6 CapitalMarketSecurities, 6 UsingtheWallStreetJournal:AssessingStockPerformance,8 Derivative Securities, 8 Valuation ofSecurities inFinancialMarkets, 9 MarketEfficiency, 10 Financial MarketRegulation,11 GlobalFinancial Markets, 12 International CorporateGovernance, 12 GlobalIntegration, 13 RoleoftheForeignExchangeMarket, 13 Roleof FinancialInstitutions, 13 RoleofDepository Institutions,14 RoleofNondepository Financial Institutions,15 ComparisonofRoles amongFinancial Institutions,16 RelativeImportanceofFinancial Institutions, 18 ConsolidationofFinancial Institutions, 19 ImpactoftheInternet onFinancial Institutions, 21 GlobalExpansionbyFinancial Institutions, 21 Impactof theCreditCrisison Financial Institutions, 21 Summary,22 Point Counter-Point: Will ComputerTechnology CauseFinancialIntermediaries toBecomeExtinct? 23 Questionsand Applications, 23 AdvancedQuestions, 24 InterpretingFinancial News,24 Managing inFinancial Markets,24 Flowof FundsExercise: Rolesof FinancialMarketsand Institutions, 25 Internet/Excel Exercises,25 WSJ Exercise:Differentiating betweenPrimaryand Secondary Markets,26 Term PaperontheCreditCrisis, 27 vii Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Licensed to: viii Contents 2: DETERMINATIONOFINTERESTRATES 29 Loanable FundsTheory, 29 HouseholdDemandfor Loanable Funds,29 BusinessDemand forLoanable Funds, 30 Government Demandfor Loanable Funds,31 ForeignDemand forLoanable Funds, 32 Aggregate Demandfor Loanable Funds,32 SupplyofLoanableFunds, 34 EquilibriumInterestRate, 35 Factors ThatAffectInterestRates, 36 ImpactofEconomicGrowthonInterestRates, 37 ImpactofInflation onInterestRates, 38 ImpactofMonetary Policyon InterestRates,39 ImpactoftheBudgetDeficit onInterestRates,39 ImpactofForeign FlowsofFundsonInterestRates,40 SummaryofForces ThatAffect InterestRates,41 Forecasting InterestRates,43 Summary,45 PointCounter-Point:DoesaLargeFiscalBudgetDeficitResultin HigherInterestRates?45 Questionsand Applications,45 AdvancedQuestions, 46 InterpretingFinancial News,46 ManaginginFinancial Markets,46 Problems, 47 Flowof FundsExercise: HowtheFlowof FundsAffectsInterestRates, 47 Internet/Excel Exercises,47 WSJExercise: Forecasting InterestRates,48 3: STRUCTUREOFINTERESTRATES 49 WhyDebtSecurityYields Vary,49 Credit(Default) Risk,49 Liquidity,51 TaxStatus, 51 TermtoMaturity,52 Explaining Actual YieldDifferentials, 53 YieldDifferentials ofMoneyMarketSecurities, 53 YieldDifferentials ofCapitalMarketSecurities, 53 EstimatingtheAppropriate Yield,54 UsingtheWallStreetJournal:AssessingtheYieldCurve,56 ACloserLook attheTermStructure, 56 PureExpectations Theory, 56 Liquidity PremiumTheory,61 SegmentedMarketsTheory, 63 ResearchonTerm StructureTheories, 64 IntegratingtheTheories oftheTermStructure, 65 Usesofthe TermStructure,66 WhytheSlope oftheYieldCurveChanges,67 HowtheYieldCurve HasChangedoverTime,68 InternationalStructure ofInterestRates, 68 Summary,70 Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.