Financial Markets and Institutions (2-downloads)

Q

Qubes, 307

Quotas, foreign exchange rates 

and, 351

Qwest, 157

R

Raines, Franklin, 285

Random walk

defined, 121

foreign markets and, 124

stock market prices theory, 121

Rate of capital gain, 52, 55–56

Rate of return, 36

calculating, 51–52

for chaebols, South Korea, 185

on coupon bonds, 53t

defined, 50

interest rates and, 50–61

Rate-sensitive assets and liabilities,

573–76, 581–82, 584

Reagan, Ronald, 203, 603

Real estate bubble, 339–40

Real estate mortgage investment

conduits (REMICs), 338

Real estate speculation, 339–40

Real exchange rate, 349

Real interest rates, 48–50, 49n

after-tax, 50n

foreign exchange rates and, 363, 364f

Real terms, 48

Recession, 81–82

Reciprocal regional regulations, 476

“Red book,” 199, 200

Redemption fees, 502

Redlining, 436

Refinancing operations, 231

Regional securities markets, 19

Registered bonds, 289

Registration statements, Securities and

Exchange Commission, 546

Regulation, 30–33, 425–50

asset holdings restrictions, 430

asymmetric information and, 425–42

avoidance of, 465–69

banking crises and, 443–44, 445–48

capital requirements, 430–31

chartering, 433–34

circumvention of, 439

competition restrictions, 436–38

consumer protection, 436

disclosure requirements, 435–36

Dodd-Frank Act, 448–49

early, 455–56

of electronic banking, 439

in emerging market economies,

179–80, 181

examination, 433–34

FDIC Improvement Act of 1991,

444–45

of financial information, 30–31, 142,

147, 153

future, 449–50

government safety net, 425–30

international, 440

major legislation, 441–42t

moral hazard and, 30–31

multiple agencies, 456–57

of mutual funds, 502–3

in other countries, 33

overregulation, 450

pension plans, 537–40

principal-agent problem and, 147

prompt corrective action, 431, 433

purpose of, 137

reciprocal regional compacts, 476

risk management assessment, 

434–35

savings and loan crisis and, 443–44

of securities firms, 556–57

of stock market, 319–20

of systemic risk, 449

types of, 425–42

Regulation B, 436

Regulation K, 485

Regulation Q, 33, 197, 267, 444, 465, 466,

470–71, 499

Regulation Z, 436, 438

Regulatory agencies, 31t, 456–57

Regulatory arbitrage, 431

Regulatory forbearance, 539

Reinsurance, 525

Reinvestment risk, 54–55, 468

Repurchase agreements (repos), 174

interest rates on, 267

markets, 276t

money markets and, 266–67

open market operations and, 226

Required reserve ratio, 216, 401

Required reserves, 215–16

changes in, 228–30

defined, 401

demand curve, 218

discount window and, 226–27

European Central Bank, 231

financial innovation and, 465

monetary policy and, 222, 223f

Research

conflicts of interest and, 155–56

online, 9

Reserve accounts, 334

Reserve Bank of New Zealand, 236,

237–38

Reserve Bank of New Zealand Act,

237–38

Reserve currency, 381, 382, 389–90

Reserve Primary Fund, 467, 499

Reserve requirements, 401, 465

Reserves (bank assets)

banking operations and, 403–5

defined, 401

liquidity management and, 406–8

Reserves (Federal Reserve deposits)

bank borrowings of, 401

borrowed, 218–19

defined, 215

I-18

Index

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demand and supply in market for,

218–19

demand curve, 218–19

discount lending and, 217

excess, 215–16, 218

interest paid by Federal Reserve, 220

interest rates on, 218, 221

market equilibrium, 219

market for, 217–22

nonborrowed, 218–19

open market operations and, 217

required, 215–16, 218, 226–30

supply curve, 218–19

Reserves (savings), insurance vs., 514

Residential mortgages, 325–30. See

also mortgages; subprime

mortgage crisis

Residual claimants, 18, 303

Resolution authority, 448

Restrictive covenants

on corporate bonds, 289

credit risk management and, 

570, 571

defined, 137

in developing countries, 152

monitoring and enforcement of,

149–50

Restrictive provisions, in insurance

policies, 528

Retirement mutual funds, 491

Return (rate of return). See also rate

of return

interest rates and, 50–61

Return on assets (ROA), 411–12, 

419, 421t

Return on equity (ROE), 411–12, 

419, 421t

Revaluation, of currency, 383

Revenue bonds, 287

Reverse annuity mortgages (RAMs), 

332, 333t

Reverse repos, 226

Reverse transactions, 231

Revolving underwriting facilities 

(RUFs), 414

Riegle-Neal Interstate Banking and

Branching Efficiency Act of 1994,

429, 442t, 477–78, 480

Risk

arbitrage and, 119

asset demand and, 64, 66–67

in bank loans, 402

bond demand curve and, 73t, 75

defined, 25, 64

estimating, 312–13, 314

in municipal bond market, 288

stock valuation and, 312–13

Risk-adverse behavior, 514

Risk-adverse investors, 67

Risk assessment, by banks, 415

Risk-based premiums, 527–28

Risk management, 568–85

assessment of, 434–35

in financial institutions, 7–8

regulation of, 434–35

Risk premiums, 90, 91, 94, 115, 170

Risk sharing, 25

Risk structure of interest rates, 89–96,

90–92, 112

Risk taking

financial crises and, 164, 166, 167

lender of last resort and, 228

regulation of, 434–35

Risky assets, 32, 430

Robertson Stephens & Co., 545

Rouge traders, 416

Royal Bank of Canada, 460

Russia, 152, 181, 232. See also Soviet

Union

S

Sallie Mae, 284

Salomon Brothers, 467, 468

Salomon Smith Barney, 159, 263, 264,

480, 556

Sarbanes-Oxley Act of 2002, 21, 158–60,

435, 442t, 563

Savers, 17

Savings accounts, 400

Savings and loan associations, 27t,

28–29, 28t

1980s financial crisis, 443–44

bailout of, 444

interest-rate risk and, 573

mortgages issued by, 325, 333, 334t

regulation of, 443–44, 482

structure of, 482

Savings deposits, 28, 256f

Scandinavia, 462

Screening

in credit risk management, 569–70

by insurance companies, 527

Sears, 460

Seasonal credit, 227

Seasoned issues, 546

Secondary credit, 227

Secondary loan participation, 414

Secondary markets, 18–19

capital markets, 280

defined, 543

money market securities, 255

mortgages, 325, 328, 335–36

organization of, 19

Secondary reserves, 402, 408

Second Bank of the United States,

192, 455

Second mortgages, 328, 331–32, 333t

Secured corporate bonds, 290–91

Secured debt, 137

Secured loans, 571–72

Securities

bank holdings of, 402

bank management of, 407

defined, 2, 16

efficient market hypothesis and,

117–18

equity sales, 550–51

guarantees of, 414

new issues, 548f

pricing, 545–46

primary markets for, 18–19

secondary markets for, 18–19

taking public, 547–50, 550f

underwriting, 18, 545–50

unexploited profit opportunities, 119

Securities Act of 1933, 31, 319, 435, 441t,

502, 557

Securities Act of 1934, 319–20,

502–3, 557

Securities Acts Amendment of 1975, 554

Securities and Exchange Commission

(SEC), 30, 31t, 122, 435, 467, 480

Corporate Finance division, 319

credit rating agencies and, 158

Enforcement division, 320

Enron and, 143, 157

exemption from registration, 268

financial information and, 142

functions of, 31, 319–20, 546, 557

hedge funds and, 506

insider trading and, 556

investment banks and, 546

Investment Management division, 320

Market Regulation division, 320

mutual funds and, 495, 502, 503,

509–10

options and, 606

organization of, 319–20

registration statements, 546

Sarbanes-Oxley Act and, 159

Securities brokers, 543, 552–55, 564

Securities dealers, 543, 552, 555–56, 564

Securities Exchange Act of 1934, 441t

Securities firms

brokers and dealers, 552–56

commercial banks and, 558

functions of, 543

regulation of, 556–57

Securities Investor Protection

Corporation (SIPC), 554, 557

Securities orders, 553–54

Securities prices, efficient market

hypothesis and, 117–20

Securities Protection Corporation Act of

1970, 557

Securitization, 171, 336, 464–65. See also

mortgage-backed securities

Securitized mortgages, 336–40, 464. See

also mortgage-backed securities

Security First Network, 460

Index

I-19

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Seed investing, 562

Self-Employed Individual Tax Retirement

Act of 1962, 539

Semiannual bonds, 296–98

Semistrong-form efficiency test, 123n

Separate Trading of Registered Interest

and Principal Securities

(STRIPS), 283–84, 467–69

September 11 terrorist attacks

stock market and, 315

terrorism insurance and, 525

Sequoia Capital, 563

Settlement price, 600

Shadow banking system, 174–75,

176, 457

Shareholders, mutual funds, 30, 494, 

496, 507

Shares, 28, 29, 30

Shiller, Robert, 125

Short position, 590–91, 593, 595, 596, 

599, 601

Short sales, 131, 553

Short-term capital flows, 185

Short-term debt instruments, 18, 53–54

Short-term interest rates, bonds

expectations theory and, 102n, 103

liquidity premium theory and, 103, 

104, 106

yield curve and, 107f, 108–9

Short-term securities, 254

Silver market, 600

Simple interest rate, 37–38, 41

Simple loans, 37, 39, 40–41

Simple present value, 37–39

SIMPLE retirement plans, 540

Singapore, 389

Sinking fund, 289

Small Business Protection Act of

1996, 540

Small-denomination time deposits, 400

Small-firm effect, 124–25

Smart cards, 462

“Smart money,” 119, 131

“Snake,” 381

Social contagion, 131

Social Security, 534–37, 540

baby boom generation and, 534–35

benefits calculations, 534

cost-of-living adjustment, 536

establishment of, 534

life expectancy and, 536, 537

maximum wage taxed, 535

minimum age for receiving,

535–36, 537

reform of, 536–37

trust fund assets, 535f, 536f

trust fund depletion, 535

Social Security Act, 536

Soros, George, 388

South Korea, 185–86, 389

Soviet Union, 154, 272. See also Russia

S&P 500 Index, 133, 307, 318, 603–5

Spain, 237

Spanish peseta, 387

Speculation

Commodity Futures Modernization Act

and, 293–94

real estate, 339–40

Speculative attacks, 182, 186, 385, 387

Speculative bubbles, 131

Speculative-grade bonds, 92, 291

Spiders, 307

Spinning, 156

Spitzer, Eliot, 159, 509, 526

Spot exchange rate, 346, 347t,

353, 601n

Spot rates, 110

Spot transactions, 346

Spread, 552

Standard and Poor’s Corp., 92, 141, 

157, 176

bond ratings, 292t

S&P 500 Index, 133, 307, 318, 603–5

Standard deviation, 66–67

Standing lending facility, 226

Staples, 559

Starbucks, 559

State and local government

securities, 402

State banking and insurance

commissions, 31t

State banks (state-chartered banks), 456

State bonds, 498

State-owned banks, in developing

countries, 153

Sterilized foreign exchange interventions,

377–78, 383–84

Stern, Edward J., 508

Stewart, Martha, 553

Stock brokers, 307, 308

Stock companies, 517

Stock funds, 497–98

Stockholders

bondholders vs., 289

common, 303

insiders, 31

preferred, 303–4

rights of, 303

Stock index futures contracts, 

603–5, 619

Stock market crashes, 3. See also Great

Depression

of 1929, 169–70, 319

of 1987 (Black Monday), 3, 130, 131,

132, 553–54, 603

federal regulation and, 319

stock prices, 130, 131

Tech Crash of 2000, 3, 130, 131, 132

Stock market indexes, 314–18, 322

Stock market risk, 603

Stock markets, 302–20

behavioral finance and, 131

business investment decisions and, 4

defined, 3–4

electronic communications networks,

306–7

Enron scandal and, 315

excessive volatility of, 125

exchange traded funds, 307

falling prices, 175

financial crisis of 2007–2009 and, 176,

314–15

foreign, 22, 23f

functions of, 15

hot tips on, 128

investing guide, 127–29

lemons problem and, 140–41

in Mexico, 186

organization of, 19

organized securities exchanges, 

304–6

overreaction of, 125

over-the-counter, 305–206

prices set by, 311–13

price volatility, 3–4

record highs, 302

regulation of, 319–20

security prices set by, 311–13

September 11 terrorist attacks

and, 315

in South Korea, 186

in Thailand, 186

types of, 304–7, 320

Stock options, 606

Stock prices. See also stock valuation

efficient market hypothesis and,

117–26, 132

fluctuations in, 125–26, 314

forecasting, 121

in foreign markets, 124

good news and, 128–29

during the Great Depression, 169f

information and, 121, 126

January effect on, 126

market crashes, 130, 131

market overreaction and, 126

mean reversion and, 126

random walk behavior of, 121–23

semistrong-form efficiency test, 123n

set by markets, 311–13

small-firm effect on, 125–26

strong-form efficiency test, 123n

technical analysis of, 123

trader interaction and, 312–13, 320

unpredictability of, 120–21, 123, 127,

128–29, 132

volatility and, 126

weak-form efficiency test, 123n

Stocks, 319–20

defined, 3, 17

I-20

Index

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dividends on, 302

earning a return on, 302

foreign, 318–19

initial public offerings (IPO), 156

investing in, 302–7

issued, 299f

sale of, 304–7

as source of external funds, 135, 

135n, 136f

underwriting, 545–50

valuation errors, 313–14

valuation of, 307–11

Stock valuation, 307–11, 320. See also

stock prices

company growth and, 309–10

determining present value of, 308

errors in, 313–14

financial information and, 312–13

generalized dividend valuation 

model, 309

Gordon growth model, 309–10

market price and, 312–13

one-period valuation model, 308

perceived risk and, 312–13

price earnings valuation model, 311

Stop loss orders, 553

Stored-value cards, 463

Strategic income bonds, 498

Stress testing, 415, 435

Strike price, 606, 610, 611

Strong-form efficiency test, 123n

Structural unemployment, 234

Structured credit products, 171, 172

Structured investment vehicles (SIVs),

413, 449

Student Loan Marketing Association

(Sallie Mae), 284

Subordinated debentures, 291

Subprime mortgage crisis, 552

federal bailout of Fannie Mae and

Freddie Mac, 284–86

financial crisis of 2007–2009 and, 171,

172–73

financial derivatives and, 618–19

market collapse, 93

monoline insurers and, 531

Subprime mortgage loans, 338–40

asset-backed commercial paper and,

270–71

credit rating agencies and, 158

defined, 338

foreign exchange rate and, 364–65

Gordon growth model and, 314–15

mortgage brokers and, 438

Sumitomo Corp., 416

Sun Microsystems, 559

SuperDOT (Super Designated Order

Turnaround) system, 305

Superregional banks, 476

Supply, excess, 71

Supply and demand analysis

analysis, 71–72

of bond market, 68–72

Bush tax cuts and, 96

efficient market hypothesis and, 118

federal funds rate and, 223

fixed exchange rate regimes, 381–82

foreign exchange rates behavior and,

352–54

liquidity premium theory and, 103–4

market equilibrium and, 70–71

market segmentation theory and, 103

monetary policy and, 246, 247f

of reserves market, 218–19, 220

Supply curve

for bonds, 72–77

business cycle expansion and, 79–80

defined, 69–70

for domestic assets, 353

equilibrium interest rates and, 75–77

expected inflation and, 76–77

expected investment profitability 

and, 76

for fixed exchange rate regimes, 382

government deficits and, 77

for reserves market, 218–19, 220–21

Supply-side economics, 234

Survivorship benefits, 520

Sutton, Willie, 181

Swap lines, 229

Swaps, 613

Swaptions, 613

Sweden, 237, 240, 387, 462

Sweep accounts, 466–67

Swiss National Bank, 229

Syndicates, 547

Systemic financial institutions, 448

Systemic risk regulation, 449

T

T-accounts, 216–17, 375–76, 403–5

Tails, 525

Taiwan, 389

Takeovers, 122

Tanner, Michael, 535

Target financing rate, 230

Tariffs, 351

Taxes

bank income before, 419

bearer bonds and, 289

bond interest rates and, 94–96

bonds and, 94–96

Bush tax cuts, 96

capital gains, 129n

debt contracts and, 148n

insurance company dividends

policy, 517

interest rates and, 94–96

second mortgage deductions, 332

Tax Reform Act of 1986, 338, 540

Taylor, John, 174

Taylor rule, 174

TCBY, 559

“Teal book,” 199, 200

“Teaser” loans, 339

Tech Crash of 2000, 3, 130, 131, 132

Technical analysis, of stock prices, 123

Tech-stock bubble, 243–44

Temporary Guarantee Program, 499

Tender offers, 551

“Tequila effect,” 389

Term Asset-Backed Securities Loan

Facility (TALF), 230

Term Auction Facility (TAF), 229

Term life insurance policies, 520, 

520t, 521

Term securities, 267

Term Securities Lending Facility 

(TSLF), 229

Term structure of interest rates, 89,

96–112

defined, 89

evidence on, 106–7

expectations theory and, 97–102,

112–13

forecasting interest rates with, 110–12

liquidity premium theory and, 97–98,

103–6, 113

market segmentation theory and,

97–98, 102–3, 113

yield curve and, 96–97

Term to expiration, 606

Term to maturity

bond interest rates and, 96–97

coupon bonds, 103n

duration and, 58

Terrorism Risk Insurance Act of

2002, 525

Texaco, 534

Thailand, 186–87, 388–89

Theory of efficient capital markets, 117.