GLOBAL EDITION Financial Markets and Institutions For these Global Editions, the editorial team at Pearson has collaborated with educators across the world to address a wide range of subjects and requirements, equipping students with the best possible learning tools This Global Edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, customization, and adaptation from the North American version GLOBAL EDITION NINTH EDITION Mishkin Eakins and Institutions NINTH EDITION Frederic S Mishkin • Stanley G Eakins GLOBAL EDITION This is a special edition of an established title widely used by colleges and universities throughout the world Pearson published this exclusive edition for the benefit of students outside the United States and Canada If you purchased this book within the United States or Canada, you should be aware that it has been imported without the approval of the Publisher or Author Financial Markets Pearson Global Edition Mishkin_09_1292215003_Final.indd 08/11/17 3:21 PM FINANCIAL MARKETS AND INSTITUTIONS Ninth Edition Global Edition Frederic S Mishkin Graduate School of Business, Columbia University Stanley G Eakins East Carolina University Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • Sao Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan A01_MISH5006_09_GE_FM.indd 07/11/17 12:10 PM The Pearson Series in Finance Berk/DeMarzo Gitman/Zutter Corporate Finance*† Corporate Finance: The Core*† Principles of Managerial Finance*† Principles of Managerial Finance––Brief Edition*† Berk/DeMarzo/Harford Fundamentals of Corporate Finance*† Financial Management: Core Concepts*† Copeland/Weston/Shastri Financial Theory and Corporate Policy Dorfman/Cather Introduction to Risk Management and Insurance Eakins/McNally Corporate Finance Online* † Multinational Business Finance Bond Markets: 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information herein Microsoft and/or its respective suppliers may make improvements and/ or changes in the product(s) and/or the program(s) described herein at any time Partial screen shots may be viewed in full within the software version specified Microsoft® and Windows® are registered trademarks of the Microsoft Corporation in the U.S.A and other countries This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation Acknowledgments of third-party content appear on the appropriate page within the text PEARSON AND ALWAYS LEARNING are exclusive trademarks owned by Pearson Education, Inc or its affiliates in the U.S and/or other countries Pearson Education Limited KAO Two KAO Park Harlow CM17 9NA United Kingdom and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com The rights of Frederic S Mishkin and Stanley G Eakins, to be identified as the authors of this work, have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Financial Markets and Institutions, 9th Edition, ISBN 978-0-13-451926-5 by Frederic S Mishkin and Stanley G Eakins, published by Pearson Education © 2018 A01_MISH5006_09_GE_FM.indd 10/11/17 1:28 pm Copyright © 2018, 2015, 2012 by Frederic S Mishkin All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned com/permissions/ ISBN 10: 1-292-21500-3 ISBN 13: 978-1-292-21500-6 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 Typeset in Times NR MT Pro by Cenveo® Publisher Services Printed and bound by Vivar in Malaysia A01_MISH5006_09_GE_FM.indd 10/11/17 1:10 pm To My Dad —F S M To My Wife, Laurie —S G E A01_MISH5006_09_GE_FM.indd 07/11/17 12:10 PM This page intentionally left blank A01_MISH4182_11_GE_FM.indd 10/06/15 11:46 am Contents in Brief Contents in Detail Contents on the Web Preface About the Authors PART ONE INTRODUCTION 27 31 39 41 Why Study Financial Markets and Institutions? Overview of the Financial System 41 55 77 PART TWO FUNDAMENTALS OF FINANCIAL MARKETS What Do Interest Rates Mean and What Is Their Role in Valuation? Why Do Interest Rates Change? How Do Risk and Term Structure Affect Interest Rates? Are Financial Markets Efficient? 77 106 129 157 175 PART THREE FUNDAMENTALS OF FINANCIAL INSTITUTIONS Why Do Financial Institutions Exist? Why Do Financial Crises Occur and Why Are They So Damaging to the Economy? 175 225 PART FOUR CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY 206 Central Banks 10 Conduct of Monetary Policy 225 244 285 PART FIVE FINANCIAL MARKETS 11 The Money Markets 12 The Bond Market 13 The Stock Market 14 The Mortgage Markets 15 The Foreign Exchange Market 16 The International Financial System 285 308 333 354 375 403 PART SIX THE FINANCIAL INSTITUTIONS INDUSTRY 425 17 Banking and the Management of Financial Institutions 18 Financial Regulation 19 Banking Industry: Structure and Competition 20 The Mutual Fund Industry 425 451 479 515 A01_MISH5006_09_GE_FM.indd 07/11/17 12:10 PM Contents in Brief 21 Insurance Companies and Pension Funds 22 Investment Banks, Security Brokers and Dealers, and Venture Capital Firms 540 594 PART SEVEN THE MANAGEMENT OF FINANCIAL INSTITUTIONS 23 Risk Management in Financial Institutions 24 Hedging with Financial Derivatives Glossary Index 570 594 615 649 667 CHAPTERS ON THE WEB 25 Financial Crises in Emerging Market Economies 26 Savings Associations and Credit Unions 27 Finance Companies A01_MISH5006_09_GE_FM.indd W-1 W-22 W-49 07/11/17 12:10 PM Contents in Detail Contents on the Web Preface About the Authors PART ONE INTRODUCTION Chapter Why Study Financial Markets and Institutions? PREVIEW Why Study Financial Markets? Debt Markets and Interest Rates The Stock Market The Foreign Exchange Market Why Study Financial Institutions? Structure of the Financial System Financial Crises Central Banks and the Conduct of Monetary Policy The International Financial System Banks and Other Financial Institutions Financial Innovation Managing Risk in Financial Institutions Applied Managerial Perspective How We Will Study Financial Markets and Institutions Exploring the Web Collecting and Graphing Data Web Exercise Concluding Remarks SUMMARY KEY TERMS QUESTIONS QUANTITATIVE PROBLEMS WEB EXERCISES 27 31 39 Chapter Overview of the Financial System PREVIEW Function of Financial Markets Structure of Financial Markets Debt and Equity Markets Primary and Secondary Markets Exchanges and Over-the-Counter Markets Money and Capital Markets 41 41 42 42 43 44 46 46 46 47 47 47 47 48 48 49 49 50 50 52 52 53 53 54 54 55 55 56 58 58 58 59 60 A01_MISH5006_09_GE_FM.indd 07/11/17 12:10 PM ... Contracts Financial Futures Markets Financial Futures Contracts FOLLOWING THE FINANCIAL NEWS  Financial Futures THE PRACTICING MANAGER  Hedging with Financial Futures Organization of Trading in Financial. .. Structure of the Financial System Financial Crises Central Banks and the Conduct of Monetary Policy The International Financial System Banks and Other Financial Institutions Financial Innovation... MANAGEMENT OF FINANCIAL INSTITUTIONS 23 Risk Management in Financial Institutions 24 Hedging with Financial Derivatives Glossary Index 570 594 615 649 667 CHAPTERS ON THE WEB 25 Financial Crises