Contents
in Detail
xvii
Liquidity
274
How Money Market Securities Are Valued
274
■ FOLLOWING
THE FINANCIAL NEWS
Money Market Rates
274
Summary
276
Key Terms
277
Questions
277
Quantitative Problems
277
Web Exercises
278
Chapter 12 The Bond Market
279
Preview
279
Purpose of the Capital Market
279
Capital Market Participants
280
Capital Market Trading
280
Types of Bonds
281
Treasury Notes and Bonds
282
Treasury Bond Interest Rates
282
Treasury Inflation-Protected Securities (TIPS)
282
Treasury STRIPS
283
Agency Bonds
284
■ CASE
The 2007–2009 Financial Crisis and the Bailout of Fannie Mae
and Freddie Mac
284
Municipal Bonds
286
Risk in the Municipal Bond Market
288
Corporate Bonds
288
Characteristics of Corporate Bonds
289
Types of Corporate Bonds
290
Financial Guarantees for Bonds
293
Current Yield Calculation
294
Current Yield
294
Finding the Value of Coupon Bonds
295
Finding the Price of Semiannual Bonds
296
Investing in Bonds
298
Summary
299
Key Terms
300
Questions
300
Quantitative Problems
300
Web Exercises
301
Chapter 13 The Stock Market
302
Preview
302
Investing
in Stocks
302
Common Stock vs. Preferred Stock
303
How Stocks Are Sold
304
Computing the Price of Common Stock
307
The One-Period Valuation Model
308
The Generalized Dividend Valuation Model
309
xviii
Contents in Detail
The Gordon Growth Model
309
Price Earnings Valuation Method
311
How the Market Sets Security Prices
311
Errors in Valuation
313
Problems with Estimating Growth
313
Problems with Estimating Risk
314
Problems with Forecasting Dividends
314
■ CASE
The 2007–2009 Financial Crisis and the Stock Market
314
■ CASE
The September 11 Terrorist Attack, the Enron Scandal, and
the Stock Market
315
Stock Market Indexes
316
■ MINI-CASE
History of the Dow Jones Industrial Average
318
Buying Foreign Stocks
318
Regulation of the Stock Market
319
The Securities and Exchange Commission
319
Summary
320
Key Terms
320
Questions
321
Quantitative Problems
321
Web Exercises
322
Chapter 14 The Mortgage Markets
323
Preview
323
What Are Mortgages?
324
Characteristics
of the Residential Mortgage
325
Mortgage Interest Rates
325
■ CASE
The Discount Point Decision
326
Loan Terms
327
Mortgage Loan Amortization
329
Types of Mortgage Loans
330
Insured and Conventional Mortgages
330
Fixed- and Adjustable-Rate Mortgages
330
Other Types of Mortgages
331
Mortgage-Lending Institutions
333
Loan Servicing
334
■ E-FINANCE
Borrowers Shop the Web for Mortgages
335
Secondary Mortgage Market
335
Securitization of Mortgages
336
What Is a Mortgage-Backed Security?
336
Types of Pass-Through Securities
337
Subprime Mortgages and CDOs
338
The Real Estate Bubble
339
Summary
340
Key Terms
340
Questions
341
Quantitative Problems
341
Web Exercises
343
Contents in Detail
xix
Chapter 15 The Foreign Exchange Market
344
Preview
344
Foreign Exchange Market
345
What Are Foreign Exchange Rates?
346
Why Are Exchange Rates Important?
346
■ FOLLOWING THE FINANCIAL NEWS
Foreign Exchange Rates
347
How Is Foreign Exchange Traded?
348
Exchange Rates in the Long Run
348
Law of One Price
348
Theory of Purchasing Power Parity
349
Why the Theory of Purchasing Power Parity Cannot Fully Explain
Exchange Rates
350
Factors That Affect Exchange Rates in the Long Run
351
Exchange Rates in the Short Run: A Supply and Demand Analysis
352
Supply Curve for Domestic Assets
353
Demand Curve for Domestic Assets
353
Equilibrium in the Foreign Exchange Market
354
Explaining Changes in Exchange Rates
355
Shifts in the Demand for Domestic Assets
355
Recap: Factors That Change the Exchange Rate
358
■ CASE
Changes in the Equilibrium Exchange Rate: An Example
360
■ CASE
Why Are Exchange Rates So Volatile?
362
■ CASE
The Dollar and Interest Rates
362
■ CASE
The Subprime Crisis and the Dollar
364
■ CASE
Reading the
Wall Street Journal: The “Currency Trading” Column
365
■ FOLLOWING THE FINANCIAL NEWS
The “Currency Trading” Column
366
■ THE PRACTICING MANAGER
Profiting from Foreign Exchange Forecasts
366
Summary
367
Key Terms
368
Questions
368
Quantitative Problems
368
Web Exercises
369
Chapter 15 Appendix The Interest Parity Condition
370
Comparing Expected Returns on Domestic and Foreign Assets
370
Interest Parity Condition
372
Chapter 16 The International Financial System
374
Preview
374
Intervention in the Foreign Exchange Market
374
Foreign Exchange Intervention and the Money Supply
374
■ INSIDE THE FED
A Day at the Federal Reserve Bank of New York’s Foreign
Exchange Desk
376
Unsterilized Intervention
377
Sterilized Intervention
377
Balance of Payments
379
■ GLOBAL
Why the Large U.S. Current Account Deficit Worries Economists
380
xx
Contents in Detail
Exchange Rate Regimes in the International Financial System
380
Fixed Exchange Rate Regimes
381
How a Fixed Exchange Rate Regime Works
381
■ GLOBAL
The Euro’s Challenge to the Dollar
383
■ GLOBAL
Argentina’s Currency Board
384
■ GLOBAL
Dollarization
385
■ CASE
The Foreign Exchange Crisis of September 1992
386
■ THE PRACTICING MANAGER
Profiting from a Foreign Exchange Crisis
387
■ CASE
Recent Foreign Exchange Crises in Emerging Market Countries:
Mexico 1994, East Asia 1997, Brazil 1999, and Argentina 2002
388
■ CASE
How Did China Accumulate Over $2 Trillion of International Reserves?
389
Managed Float
390
Capital Controls
391
Controls on Capital Outflows
391
Controls on Capital Inflows
391
The Role of the IMF
392
Should the IMF Be an International Lender of Last Resort?
392
How Should the IMF Operate?
393
Summary
395
Key Terms
395
Questions
396
Quantitative Problems
396
Web Exercises
397
Web Appendices
397
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