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Financial Institutions, Markets, and Money, 12th Edition

David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias

ISBN: 978-1-119-32126-2 November 2016 688 Pages

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Description

Kidwell's Financial Institutions, 12th 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.

Related Resources

Part I The Financial System 1

Chapter 1 An Overview of Financial Markets and Institutions 3

Chapter Preview 4

Learning Objectives 4

1.1 The Financial System 4

1.2 Financial Markets and Direct Financing 7

Do You Understand? 10

People & Events: A Brief Examination of the Causes and Effects of the Global Financial Crisis of 2007 and 2008 11

1.3 Types of Financial Markets 12

1.4 The Money Markets 14

1.5 The Capital Markets 15

Do You Understand? 17

1.6 Financial Intermediaries and Indirect Financing 17

Do You Understand? 22

1.7 Types of Financial Intermediaries 23

Do You Understand? 27

1.8 The Risks Financial Institutions Manage 28

1.9 Regulation of the Financial System 29

People & Events: Systemically Risky Banks: What is the Solution? 33

1.10 Ethics and the Financial System 33

Do You Understand? 35

Summary of Learning Objectives 35

Key Terms 36

Questions and Problems 36

Chapter 2 The Federal Reserve and Its Powers 38

Chapter Preview 39

Learning Objectives 39

2.1 Origins of the Federal Reserve System 39

People & Events: Banking before 1933, Banking from 1933 to 1980, and Banking in the Modern Era 43

2.2 The Current Structure of the Fed 44

2.3 Monetary Powers of the Board of Governors 47

2.4 The Fed’s Regulatory Powers 47

2.5 Independence of the Fed 51

Do You Understand? 53

2.6 The Fed’s Balance Sheet 53

2.7 The Fed’s Role in Check Clearing and the Growth of Electronic Payments 59

Learning by Doing 2.1: Computing a Bank’s Excess Reserve Position 60

2.8 Federal Reserve Tools of Monetary Policy 61

People & Events: The Challenges of Fed Chair Janet Yellen 62

Learning by Doing 2.2: Calculating a Bank’s Reserve Position 66

Summary of Learning Objectives 69

Key Terms 69

Questions and Problems 69

Chapter 3 The Fed and Interest Rates 71

Chapter Preview 72

Learning Objectives 72

3.1 Federal Reserve Control of the Money Supply 72

3.2 The Fed’s Influence on Interest Rates 75

3.3 The Treasury Department and Fiscal Policy 79

Do You Understand? 81

3.4 Goals of Monetary Policy 82

People & Events: The Fed as Lender of Last Resort During the Financial Crisis 87

3.5 The Fed and the Economy 88

People & Events: Black Monday 91

3.6 Complications of Monetary Policy 91

3.7 Anatomy of a Financial Crisis 93

People & Events: Good Work If You Can Get It: Executive Bonuses During Bailouts? 100

Do You Understand? 101

Summary of Learning Objectives 102

Key Terms 102

Questions and Problems 102

Part II How Interest Rates are Determined 105

Chapter 4 The Level of Interest Rates 107

Chapter Preview 108

Learning Objectives 108

4.1 What are Interest Rates? 108

4.2 The Real Rate of Interest 109

4.3 Loanable Funds Theory of Interest 111

Do You Understand? 114

4.4 Price Expectations and Interest Rates 114

4.5 A Restatement of the Fisher Equation 116

People & Events: What Is the Actual Inflation Rate? 117

Do You Understand? 121

People & Events: Estimating the Expected Rate of Inflation from TIPS 122

4.6 Forecasting Interest Rates 122

4.7 Interest Rates and Currency Values 124

Summary of Learning Objectives 125

Key Terms 126

Questions and Problems 126

Chapter 5 Bond Prices and Interest Rate Risk 127

Chapter Preview 128

Learning Objectives 128

5.1 The Time Value of Money 128

Do You Understand? 130

5.2 Bond Pricing 131

People & Events: Bond Market Liquidity and the Volcker Rule 132

Learning by Doing 5.1: Calculating the Price of a Bond Using a Financial Calculator 135

5.3 Bond Yields 136

Learning by Doing 5.2: Calculating the Yield‐to‐Maturity on a Bond 137

Do You Understand? 140

5.4 Important Bond Pricing Relationships 140

5.5 Interest Rate Risk and Duration 144

Learning by Doing 5.3: Calculating the Duration of a Bond 146

People & Events: Betting the Farm on Interest Rates and Losing 155

Do You Understand? 156

Summary of Learning Objectives 156

Key Terms 157

Questions and Problems 157

Chapter 6 The Structure of Interest Rates 159

Chapter Preview 160

Learning Objectives 160

6.1 The Term Structure of Interest Rates 160

Learning by Doing 6.1: Using the Term Structure Formula to Calculate Implied Forward Rates 165

Do You Understand? 171

People & Events: More on Forecasting Future Interest Rates 172

6.2 Default Risk 172

6.3 Tax Treatment 176

People & Events: The Credit‐Rating Club 177

Do You Understand? 180

6.4 Marketability 180

6.5 Options on Debt Securities 180

6.6 Behavior of Interest Rates over the Business Cycle 183

Do You Understand? 185

Summary of Learning Objectives 185

Key Terms 186

Questions and Problems 186

Part III Financial Markets 189

Chapter 7 Money Markets 191

Chapter Preview 192

Learning Objectives 192

7.1 How the Money Markets Work 192

7.2 Economic Role of the Money Markets 193

7.3 Features of Money Market Instruments 194

7.4 Treasury Bills 194

Learning by Doing 7.1: Calculating the Discount Yield 199

Learning by Doing 7.2: Calculating the Bond Equivalent Yield 199

Do You Understand? 200

7.5 Federal Agency Securities 201

7.6 Federal Funds 203

7.7 Other Major Money Market Instruments 205

People & Events: Lehman Brothers’ “Creative” Accounting: Repos 105 and 108 207

7.8 Money Market Participants 211

7.9 The Impact of the 2007–2008 Financial Crisis on the Money Markets 213

People & Events: How Breaking the Buck (Almost) Broke the Commercial Paper Market 216

Do You Understand? 217

Summary of Learning Objectives 218

Key Terms 219

Questions and Problems 219

Chapter 8 Bond Markets 220

Chapter Preview 221

Learning Objectives 221

8.1 Functions of the Capital Markets 221

8.2 The U.S. Government and Agency Securities 223

People & Events: What Do Negative Yields on TIPS Tell Us? 226

Do You Understand? 227

8.3 State and Local Government Bonds 227

People & Events: Build America Bonds Keep Municipal Finance Going During the Crisis 232

8.4 Corporate Bonds 232

Do You Understand? 237

8.5 Financial Guarantees 237

8.6 Securitized Credit Instruments 238

8.7 Capital Market Regulators 240

8.8 Bond Markets Around the World are Increasingly Linked 241

8.9 The Impact of the 2007–2008 Financial Crisis on the Bond Markets 242

Do You Understand? 244

Summary of Learning Objectives 244

Key Terms 245

Questions and Problems 245

Chapter 9 Mortgage Markets and Mortgage‐Backed Securities 247

Chapter Preview 248

Learning Objectives 248

9.1 The Unique Nature of Mortgage Markets 249

9.2 Types of Mortgages 249

9.3 Mortgage Qualifying 257

Learning by Doing 9.1: Determining How Much Home You Can Buy 259

Do You Understand? 260

9.4 Mortgage‐Backed Securities 261

9.5 Mortgage Prepayment Risk and Other MBS 265

Do You Understand? 270

9.6 Participants in the Mortgage Markets 271

People & Events: The Rise and Fall of Fannie and Freddie 273

Do You Understand? 274

9.7 Relationship Between Mortgage Markets and the Capital Markets 275

Summary of Learning Objectives 276

Key Terms 277

Questions and Problems 278

Chapter 10 Equity Markets 279

Chapter Preview 280

Learning Objectives 280

10.1 What are Equity Securities? 280

10.2 Equity Markets 282

People & Events: The Retail Brokerage Industry 287

10.3 Equity Trading 287

10.4 Global Stock Markets 291

10.5 Large-Scale and High Frequency Trading 292

People & Events: High Speed Trading and the Demise of Knight Capital Group in 45 Minutes 293

10.6 Regulation of Equity Markets 294

Do You Understand? 294

10.7 Stock Market Indexes 295

People & Events: Circuit Breakers, Black Monday, and the Flash Crash 296

Summary of Learning Objectives 297

Key Terms 298

Questions and Problems 299

Chapter 11 Derivatives Markets 300

Chapter Preview 301

Learning Objectives 301

11.1 The Nature of Derivative Securities 301

11.2 Forward Markets 302

11.3 Futures Markets 304

Do You Understand? 311

11.4 Uses of the Financial Futures Markets 311

Learning by Doing 11.1: Hedging Risk in a Stock Portfolio 313

11.5 Risks in the Futures Markets 318

Do You Understand? 319

11.6 Options Markets 319

Do You Understand? 325

11.7 Swap Markets 326

People & Events: Swap Market Regulation 329

Summary of Learning Objectives 330

Key Terms 331

Questions and Problems 331

Chapter 12 International Markets 332

Chapter Preview 333

Learning Objectives 333

12.1 The Difficulties of International Trade 333

12.2 Exchange Rates 334

12.3 Balance of Payments 337

12.4 Foreign Exchange Markets 341

12.5 Spot and Forward Transactions 343

Learning by Doing 12.1: Using Forward Contracts to Hedge Exchange Rate Risks 343

People & Events: The Big Mac Test of Purchasing Power Parity 345

12.6 Capital Flows and Exchange Rates 346

Do You Understand? 349

People & Events: The Greek Crisis and Lessons for the U.S. 350

12.7 Government Intervention in Foreign Exchange Markets 351

Learning by Doing 12.2: Using Purchasing Power Parity to Determine the Expected Exchange Rate 353

12.8 Financing International Trade 354

Do You Understand? 355

12.9 International Money and Capital Markets 355

12.10 The Globalization of Financial Markets 358

Summary of Learning Objectives 360

Key Terms 360

Questions and Problems 361

Part IV Commercial Banking 363

Chapter 13 Commercial Bank Operations 365

Chapter Preview 366

Learning Objectives 366

13.1 An Overview of the Banking Industry 366

13.2 Balance Sheet for a Commercial Bank 369

13.3 The Source of Bank Funds 370

Do You Understand? 375

13.4 Bank Uses of Funds: Bank Investments and Cash Assets 376

13.5 Bank Uses of Funds: Loans and Leases 378

13.6 Loan Pricing 381

13.7 Analysis of Loan Credit Risk 384

People & Events: What’s Your Score? 385

Do You Understand? 386

13.8 Fee‐Based Services 386

13.9 Off‐Balance‐Sheet Banking 387

Do You Understand? 391

13.10 Bank Earnings 392

13.11 Bank Performance 396

Do You Understand? 397

Summary of Learning Objectives 398

Key Terms 398

Questions and Problems 399

Chapter 14 International Banking 400

Chapter Preview 401

Learning Objectives 401

14.1 Development of International Banking 401

14.2 Regulation of Overseas Banking Activities 404

14.3 Delivery of Overseas Banking Services 406

Do You Understand? 409

14.4 International Lending 409

People & Events: The LIBOR Scandal 411

Do You Understand? 416

14.5 Foreign Banks in the United States 416

14.6 Future Directions of International Banking 420

Summary of Learning Objectives 420

Key Terms 421

Questions and Problems 421

Chapter 15 Regulation of Financial Institutions 422

Chapter Preview 423

Learning Objectives 423

15.1 Reasons for Regulation 423

15.2 Bank Failures and Regulation 426

People & Events: WaMu and the Destructive “Power of Yes” 431

15.3 Safety and Soundness Regulation: Deposit Insurance 432

Do You Understand? 434

15.4 Deposit Insurance Issues 435

Do You Understand? 438

15.5 Safety and Soundness Regulation: Capital Requirements 439

Do You Understand? 447

15.6 Bank Examinations 447

15.7 Structure and Competition Regulations 450

15.8 Consumer Protection Regulations 452

People & Events: Excerpts from “What are the FDIC’s primary new responsibilities under the new law?” 454

15.9 Bank Regulators 456

Do You Understand? 458

Summary of Learning Objectives 459

Key Terms 459

Questions and Problems 460

Part V Financial Institutions 463

Chapter 16 Thrift Institutions and Finance Companies 465

Chapter Preview 466

Learning Objectives 466

16.1 Historical Development of Savings Institutions 467

16.2 Operations of Savings Institutions 470

Do You Understand? 478

16.3 Credit Unions 478

People & Events: Demographic Change Brings Opportunity 479

16.4 Thrift Institutions Around the Globe 484

People & Events: Commercial Banks Versus Credit Unions 485

Do You Understand? 486

16.5 Finance Companies 486

People & Events: GE Divests Much of Its Finance Company Business 488

Do You Understand? 494

Summary of Learning Objectives 494

Key Terms 495

Questions and Problems 495

Chapter 17 Insurance Companies and Pension Funds 496

Chapter Preview 497

Learning Objectives 497

17.1 Insurance 497

People & Events: 9/11 and Katrina: Insurance Coverage Disputes 499

17.2 The Insurance Industry 501

People & Events: The Rise, Fall, and Return of American International Group (AIG) 503

Do You Understand? 508

17.3 Life and Health Insurance Products 508

Learning by Doing 17.1: Calculating Policyholders’ Surplus 514

Do You Understand? 515

17.4 Property and Liability Insurance Products 515

Learning by Doing 17.2: Measuring Insurance Company Profitability with the Combined Ratio 518

Do You Understand? 519

17.5 Pensions 519

Do You Understand? 524

Summary of Learning Objectives 524

Key Terms 525

Questions and Problems 526

Chapter 18 Investment Banking 527

Chapter Preview 528

Learning Objectives 528

18.1 The Relationship Between Commercial and Investment Banking 528

18.2 Primary Services of an Investment Bank 533

People & Events: Where, Oh, Where Have All the Investment Banks Gone? 534

Do You Understand? 543

18.3 Private Equity 543

Learning by Doing 18.1: Evaluating a Venture Capital Investment 546

Do You Understand? 548

Summary of Learning Objectives 548

Key Terms 549

Questions and Problems 549

Chapter 19 Investment Companies 551

Chapter Preview 552

Learning Objectives 552

19.1 Investment Companies 552

19.2 Open‐End Mutual Funds 553

Learning by Doing 19.1: Calculating Net Asset Value 554

People & Events: Money Market Mutual Funds Breaking the Buck 563

19.3 Closed‐End Mutual Funds 566

19.4 Exchange‐Traded Funds 567

Do You Understand? 572

19.5 Hedge Funds 572

People & Events: Hedge Funds and the Dodd‐Frank Wall Street Reform and Consumer Protection Act 573

Do You Understand? 576

19.6 Real Estate Investment Trusts 576

Summary of Learning Objectives 578

Key Terms 579

Questions and Problems 579

Chapter 20 Risk Management in Financial Institutions 580

Chapter Preview 581

Learning Objectives 581

20.1 The Dilemma: Profitability Versus Safety 581

20.2 Liquidity Management 583

Do You Understand? 586

People & Events: Operational Risk 587

20.3 Managing Credit Risk 587

People & Events: Counterparty Controversy: AIG and Its Risky Risk Management 591

Do You Understand? 593

20.4 Measuring and Assessing Interest Rate Risk 593

20.5 Hedging Interest Rate Risk 602

Learning by Doing 20.1: Measuring Interest Rate Risk 608

Do You Understand? 611

Summary of Learning Objectives 611

Key Terms 612

Questions and Problems 612

Glossary 613

Index 637

  • Revised Chapter Contents Updated to match the many changes in the rules and regulations while reflecting the impact of the global financial crisis that began in 2007, and whose impacts continue to be felt today
  • Chapter Opening Vignette  Each chapter begins with an opening vignette that describes a real company or business situation, illustrating concepts that will be presented in the chapter
  • Learning by Doing Student application that contains quantitative problems and step-by-step solutions that provide guidance on how to approach similar problems
  • People & Events Boxes describe current or historical real-world financial situations to emphasize the applicability of one or more real world concepts
  • Additional questions and problems created with an emphasis on an increased number ofquantitative problems and solutions at the end of each chapter
  • Increase in quantitative content to provide a balance between helping students understand key financial and economic concepts and providing them with the necessary problem-solving skills that employers are increasingly expecting
• Comprehensive coverage of financial institutions and markets, including the latest topics and trends in the industry, including electronic banking, and global market interactions
• Chapter Previews and Learning Objectives to motivate student interest and alert the student to the key elements 
• "Do You Understand?" questions test students' understanding of key material
• Chapter Take-Aways present a bulleted list of the most important concepts the students should take away from the chapter 
• People & Event boxes relate to hot topics in the field and chapter learning objectives.
• Internet Exercise directs students to websites from which they can obtain additional information or analyze data that illustrates key points