Financial Markets and Institutions (2-downloads)

Registered Interest and Principal Securities

(STRIPS). 284

G-16

Glossary

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A

AAA-rated bonds, 288, 291

AARP, 535

ABMs (automated banking

machines), 460

Accounting firms, 156

Account maintenance fees, 502

Acquisitions, 551–52

Actuarial tables, 519

Adjustable-rate mortgages (ARMs),

330–31, 331t, 339, 458

Adjusted forward-rate forecasts, 110

Advanced Investment Management, 505

Advances, 401

Adverse selection, 160–61

annuities and, 521

bank loans and, 144

collateral and, 144–45

credit risk management and, 569

defined, 25–26, 139

financial crises and, 167

financial intermediation and, 142–44

financial structure and, 140–45

government safety net and, 428

health insurance an, 522

in insurance, 515–16, 526, 540

lemons problem and, 140

net worth and, 145

tools for resolving, 141–45, 151t

After-tax real interest rate, 50n

Agency bonds, 284–86

Agency problems. See also principal-

agent problems

financial crisis of 2007–2009 and,

171–72

Agency theory

defined, 140, 164

financial crises and, 163, 164

AIG. See American International Group

(AIG)

Akerlof, George, 140, 162

Alex Brown, 545

Alliance Capital Management Corp., 507

Amaranth Advisors, 505

Amazon.com, 566

American depository receipts

(ADRs), 318

American Express credit card, 459

American International Group (AIG), 167,

177, 230, 294, 449, 530, 618

American options, 606

American Research & Development

(ARD), 560

American Stock Exchange, 19, 307

Amortization, of mortgages, 329–30

Amortized loans, 324

Anchor currency, 380, 383–84

Andersen, Arthur, 157

Andersen Consulting, 157

Annual percentage rate (APR), 436

Annuities, 29, 519, 521

Applebee’s, 311

Apple Computer, 553, 559

Appreciation, of currency, 346

Arbitrage, 119, 595

Arbitrageurs (arbs), 122

Archipelago, 304, 307

Argentina

currency board, 384, 385

financial crisis in, 181, 184–88,

232, 384

foreign exchange crisis in, 388–89

Arthur Andersen, 156, 157

Ask price, 306, 552

Asset-backed commercial paper (ABCP),

230, 270–71

Asset-Backed Commercial Paper Money

Market Mutual Fund Liquidity

Facility (AMLF), 230

Asset-backed securities, 230

Asset demand theory, 353

Asset holdings restrictions, 430

Asset-liability management (ALM)

committees, 410

Asset management, by banks, 405, 408–9

Asset market approach, 72

Asset-price bubbles, 166, 243–45, 250

Asset- price declines, 165f, 166, 181

Assets

of banks, 399, 401–2

decline in income advantages of, 471

defined, 2, 64

demand for, determinants of, 64–68

diversification of, 409

duration gap analysis, 576–84

of Federal Reserve, 214, 216

of financial intermediaries, 28t

fire sales of, 168

of life insurance companies,

521–22, 522f

liquidity of, 409

rate-sensitive, 573–74

restrictions on, 32

standard deviation of returns on,

66–67

Asset transformation, 25, 403

Asymmetric information, 160–61

bank panics and, 167–68, 426

credit risk management and, 569

defined, 25, 139

financial crises and, 164, 183

financial crisis of 2007–2009 and, 

172, 175

financial intermediaries health and, 32

financial regulation and, 425–42

financial structure and, 139–40

insider information and, 557

principal-agent problem and, 416

regulation and, 30–31, 142

underwriting and, 547

venture capital firms and, 559–60

ATMs (automated teller machines), 7,

460, 474–75

AT&T, 460

Audits, 142, 156, 159

Australia, 237

Auto insurance, 518, 527–28

Automated banking machines

(ABMs), 460

Automated teller machines (ATMs), 7,

460, 474–75

B

Baa corporate bonds, 2–3, 92, 93,

170, 291

Baby boomers, Social Security and,

534–35

Backup lines of credit, 414

Bad credit risks, 139, 569

Bad debt, 417, 419

Bahamas, 484, 485

I-1

Index

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Bain Capital, 558

Balance of payments, 379–80

Balance-of-payments crisis, 387

Balance sheets

bank, 182, 184, 399–410

financial crises and, 165f, 166, 174

Balloon loans, 324–25

BankAmericard, 459

Bank balance sheets

assets, 401–2

bank capital, 410

basic operations, 403–5

deposit outflows, 406–8

financial crises and, 182, 184

liabilities, 399–401

T-accounts, 403–5

Bank capital, 401, 410–13, 431, 433

Bank chartering, 433–34, 455–56

Bank credit and debit cards, 459–60

Banker’s acceptance, 271, 276t

Bankers Trust, 545

Bank examiners, 433–35

Bank failures, 183, 192

bank capital and, 410–11

defined, 410, 426

FDIC and, 426–27

Federal Reserve and, 227–28

during Great Depression, 456

number of, 1934 to 2009, 443f

principal-agency problem and, 416

savings and loan and banking crisis of

1980s, 443–44

Bank fees, 414

Bank for International Settlements (BIS),

195, 415

Bank holding companies, 457, 474, 482

Bank Holding Company Act and Douglas

Amendment, 441t

Banking, 398–421

bank balance sheet, 399–402

basic operations, 402–5

management principles, 405–12

off-balance-sheet activities, 414–15

overseas, 485

performance measurement, 417–21

Banking Acts of 1933 (Glass-Steagall)

and 1935, 441t

Banking crises, 183. See also bank panics

around the world, 445–48, 446t, 447t

Banking industry, 454–86. See also bank

management; banks

bank consolidation, 477–79

commercial banking industry

structure, 473–77

financial innovation in, 454–73

future of, 478–79

historical development of, 454–57

international banking, 483–86

nationwide banking, 477–79

other financial services and, 479–82

shadow banking system, 454

thrift industry, 482–83

Bank Insurance Fund, FDIC, 444–45

Bank loans

adverse selection and, 144

as bank assets, 402

bank operations and, 405

calling in, 408

default risk, 402

discrimination in, 436

in emerging market economies, 179–80

loan sales, 414

losses, 417, 419

profit and, 408–9

as source of external funds, 135,

136–37, 136f

Bank management, 405–13. See also

banking industry; banks

asset management, 405, 408–9

capital adequacy management, 405,

410–12

functions, 405

liability management, 405, 409–10

liquidity management, 405, 406–8

principal-agent problem and, 415, 416

risk assessment, 415

trading activities, 415, 416

Banknotes, 455

Bank of America, 177, 230, 259, 260, 

459, 460–61, 478, 507, 508, 544,

545, 552

Bank of America Merrill Lynch, 555

Bank of Canada, 206, 236, 238

Bank of Credit and Commerce

International (BCCI), 440

Bank of England, 192, 206–7, 236, 238,

386, 387, 440

Monetary Policy Committee, 365

Bank of Japan, 207

Bank of Japan Law, 207

Bank of the United States, 167, 455

Bank panics, 167–68, 192. See also

banking crises; financial panics

asymmetric information and, 426

Great Depression and, 169–70

lender of last resort and, 227–28

Bank regulators, in emerging market

economies, 179–80, 181

Bank runs. See bank panics

Bankruptcy law, 152, 154

Banks. See also bank balance sheets;

banking; banking industry; bank

management; commercial banks;

investment banks

asset management, 399, 401–2,

403, 409

branching restrictions, 33, 474–75

capitalization of, 431, 433

capital requirements for, 430–31

competition restrictions, 436–38

consolidation of, 475–79, 480–81

costs of servicing accounts, 400

credit lines, 414

defined, 7

deposit outflows, 405

deregulation of, 444

discount lending to, 227

discount window and, 226–27

in emerging market economies, 179–81

European Central Bank lending to, 231

examination of, 433–35

Federal Reserve and, 196, 227–28

financial crises, 167–70, 183, 192,

426–228, 443–48, 446t, 447t

as financial intermediaries, 144

foreign, in the U.S., 485–86

income statements, 417–19, 418t

insolvency of, 411, 429

interest limitations, 256

interest paid on deposits, 400

largest, 486t

liabilities, 399–401

mergers and acquisitions, 476

money center banks, 409–10

money markets and, 255–59

nationwide, 475–79

net income (profits before taxes), 419

numbers of, 454

online-only, 461

open market operations, 216–17

operating expenses, 417, 419

operating income, 417, 419

performance measures, 417–20

profits, 404–5, 408, 419–20, 471–72

risky assets restrictions, 430

services provided by, 400, 403

solvency of, 426–26

sources of funds, 399

state-owned, 153

trading activities, 415

virtual, 460–61

Barclays, 545, 552

Barclays Capital, 260

Barings Bank, 415, 416, 434

Basel 2, 432, 435

Basel 3, 432

Basel Accord, 431, 432, 440

Basel Committee on Banking

Supervision, 431, 432, 440

Basic gap analysis, 575

Bayou Management, 505

BBB-rated bonds, 92, 288

Bearer bonds, 289

Bearer instruments, 267

Bear Stearns, 159, 167, 176–77, 229, 294,

481, 545, 552

Behavioral finance, 131, 132

“Beige book,” 199, 200

Beneficiaries, of insurance policies, 

515, 519

I-2

Index

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Bent, Bruce, 466, 467

Bernanke, Ben, 172, 174, 200, 201–2,

203n, 209, 220, 241, 242

Best efforts agreements, 549

Bethlehem Steel, 539

Bid price, 306

Bid-rigging, 526

Black Monday Crash of 1987, 3, 130, 131,

132, 553–54, 603

Blackstone Group, 558

“Blue book,” 199, 200

Blue Cross and Blue Shield, 522

BNP Paribas, 176

Board of Governors of the Federal

Reserve System, 193, 194, 196,

197, 200, 202–3

Boesky, Ivan, 122

Bogle, John, 501

Bondholders, 289, 290

Bond indenture, 288, 299

Bond markets, 279–99

defined, 2

functions of, 2, 15

interest rate risks, 298

lemons problem and, 140–41

market equilibrium in, 70–71

supply and demand in, 68–72

Bond mutual funds, 497f, 498

Bond prices

current price, 295–98

current yield calculations, 294–95

interest rates and, 53, 64

par value and, 294–95

selling at a discount, 298

selling at a premium, 298

of semiannual bonds, 296–98

yield to maturity and, 294–95

Bonds. See also corporate bonds; 

coupon bonds

capital loss on, 53

convertible, 290

coupon rates, 281

credit ratings, 92, 93, 293

current yield calculations, 294–95

default-free, 90

default risk, 90–92, 112

defined, 2, 2n, 16, 281

demand curve, 68, 69, 72–75, 73t

expected interest rates and, 74

expected returns, 64, 65–66, 69

financial guarantees for, 293–94

income taxes and, 94–96

inflation-indexed, 282

interest-rate risk, 53–54

interest rates on, 2–3, 3n, 36, 47,

51–53, 89–90, 93–94

investing in, 298

issued, 299f

liquidity of, 73t, 93–94, 112

open market operations, 216–17

par, face, or maturity value of, 281

price volatility, 53–54

rate of return on, 36, 50–53, 50–61

reinvestment risk, 54–55

riskiness of, 73t, 75

as source of external funds, 135, 136f

supply and demand analysis, 71–72

supply curve, 69–70, 75–77

terminology, 296t

term to maturity, 96–97

types of, 281

underwriting, 545–50

valuation of, 295–98

value of, 295–98, 299

Book entry, 263

Borrowed reserves (BR), 218–19

Borrower qualification, 328–29

Borrower-spenders, 16

Borrowing. See also loans

real interest rate and, 49

Borrowings, from Federal Reserve, 401

Bosnia, 385

Brady Commission, 603

Branches, 474

Branching restrictions, 33, 437, 474–75

Brash, Donald, 238

Brazil, 232, 237, 388–89

“Break the buck,” 270–71, 499

Bretton Woods system, 381, 385, 392

British pounds, 386, 387

British-style universal banking

system, 481

Brokerage services, 553–55

discount, 554–55, 564

full-service, 554–55, 564

for investment funds, 503

regulation of, 556–57

securities orders, 553–54

Brokers, 19, 552–55

commissions, 307, 501

insurance, 526

mortgage, 438

securities, 307, 501, 543, 552–55, 564

stock, 307, 308

Brown, Gordon, 206

Brown, Henry, 466

Bubbles

asset-price bubbles, 166, 243–44

central banks and, 244

credit-driven, 243, 244

defined, 130

housing prices, 173, 174, 339–40

irrational exuberance and, 243–244

tech stock, 243–44

Bulgaria, 385

Bull markets, 3

Bundesbank, 240, 386–87

Bureaucracies, 207–8, 209

Burglary insurance, 527

Burns, Arthur, 200

Bush, George W., 96, 203

Business cycle contraction, 81–82

Business cycle expansion, 79–80, 81

Businesses. See also corporations

equity sales of, 550–51

money markets and, 259–60

stock market and, 4