Financial Markets & Institutions 13th Edition

Book Preface

Financial markets finance much of the expenditures by corporations, governments, and individuals. Financial institutions are the key intermediaries in financial markets because they transfer funds from savers to the individuals, firms, or government agencies that need funds. Financial Markets and Institutions, 13th Edition, describes financial markets and the financial institutions that serve those markets. It provides a conceptual framework that can be used to understand why markets exist. Each type of financial market is described with a focus on the securities that are traded and the participation by financial institutions.

Today, many financial institutions offer all types of financial services, such as banking, securities services, mutual fund services, and insurance services. Each type of financial service is unique, however. Therefore, the discussion of financial services in this book is organized by type of financial service that can be offered by financial institutions.

Intended Market
This text is suitable for undergraduate and master’s-level courses in financial markets, or financial institutions. To maximize students’ comprehension, some of the more difficult questions and problems should be assigned in addition to the special applications at the end of each chapter.

Organization of the Text
Part 1 (Chapters 1 through 3) introduces the key financial markets and financial institutions, explains why interest rates change over time, and explains why yields vary among securities. Part 2 (Chapters 4 and 5) describes the functions of the Federal Reserve System (the Fed) and explains how its monetary policy influences interest rates and other economic conditions. Part 3 (Chapters 6 through 9) covers the major debt security markets, Part 4 (Chapters 10 through 12) describes equity securities markets, and Part 5 (Chapters 13 through 16) covers the derivative security markets. Each chapter in Parts 3 through 5 focuses on a particular market. The integration of each market with other markets is stressed throughout these chapters. Part 6 (Chapters 17 through 20) concentrates on commercial banking, and Part 7 (Chapters 21 through 26) covers all other types of financial services provided by financial institutions.
Courses that emphasize financial markets should focus on the first five parts (Chapters 1 through 16); however, some chapters in the section on commercial banking are also relevant. Courses that emphasize financial institutions and financial services should focus on Parts 1, 2, 6, and 7, although some background on securities markets (Parts 3, 4, and 5) may be helpful.
Professors may wish to focus on certain chapters of this book and skip others, depend-ing on the intended coverage of the course they are teaching. Chapters can be rearranged without a loss in continuity. Regardless of the order in which chapters are studied, it is highly recommended that some questions and exercises from each chapter be assigned. These exercises may serve as a focal point for class discussion.

Coverage of Major Concepts and Events
Numerous concepts relating to recent events and current trends in financial markets are discussed throughout the chapters. These include the following:

■ Concerns about systemic risk
■ Behavioral finance in financial markets
■ Expert networks used to access information
■ Use of high frequency trading and robots (“bots”) to trade securities
■ “Crowdfunding” as a popular financing method for businesses
■ Changes in Federal Reserve operations and communication to financial markets
■ The increasing popularity of virtual currencies
■ Challenges in valuing companies that attempt to go public
■ Performance of venture capital and private equity funding
■ Emergence of private stock exchanges
■ Dark pools used to trade stocks
■ Governance in financial markets
■ Value-at-risk applications
■ Emergence of hedge funds
■ Stress tests imposed on commercial banks
■ Pension underfunding
Each chapter is self-contained, so professors can use classroom time to focus on the more complex concepts and rely on the text to cover the other concepts.
Features of the Text

The features of the text are as follows:

■ Part-Opening Diagram. A diagram is provided at the beginning of each part to illustrate generally how the key concepts in that part are related.
■ Objectives. A bulleted list at the beginning of each chapter identifies the key concepts in that chapter.
■ Examples. Examples are provided to reinforce key concepts.
■ Financial Reform. A Financial Reform icon in the margin indicates a discussion of financial reform as it applies to the topics covered in the chapter.
■ Ethics. An Ethics icon in the margin indicates financial ethics topics covered in the chapter.
■ Global Aspects. A Global Aspects icon in the margin indicates international coverage of the topic being discussed.
■ Summary. A bulleted list at the end of each chapter summarizes the key concepts. This list corresponds to the list of objectives at the beginning of the chapter.
■ Point/Counterpoint. A controversial issue is introduced, along with opposing arguments on that issue, and students are asked to offer their opinion.
■ Questions and Applications. The Questions and Applications section at the end of each chapter tests students’ understanding of the key concepts. These exercises may serve as homework assignments or study aids in preparation for exams.
■ Critical Thinking Question. At the end of each chapter, students are challenged to use their critical thinking skills by writing a short essay on a specific topic that was discussed in the chapter.
■ Interpreting Financial News. At the end of each chapter, students are challenged to interpret comments made in the media about the chapter’s key concepts. This gives students practice in analyzing announcements by the financial media.

■ Managing in Financial Markets. At the end of each chapter, students are placed in the position of financial managers and must make decisions about specific situations related to the key concepts in that chapter.
■ Flow of Funds Exercise. A running exercise is provided at the end of each chapter to illustrate how a manufacturing company relies on all types of financial markets and financial services provided by financial institutions.
■ Internet/Excel Exercises. At the end of each chapter, exercises introduce students to applicable information available on various websites, encourage them to apply Excel as a tool for examining related topics, or a combination of these. For example, the exercises allow students to assess yield curves, risk premiums, and stock volatility.
■ Problems. Selected chapters include problems to test students’ computational skills.
■ WSJ Exercise. This exercise appears at the end of selected chapters and gives students an opportunity to apply information provided in The Wall Street Journal to specific concepts explained in that chapter.
■ Integrative Problems. An integrative problem at the end of each part integrates the key concepts of chapters within that part.
■ Comprehensive Project. This project, found in Appendix A, requires students to apply real data to several key concepts described throughout the book.
■ Midterm and Final Self-Examinations. At the end of Chapter 16, a midterm
self-exam is offered to test students’ knowledge of financial markets. At the end
of Chapter 26, a final self-exam is offered to test students’ knowledge of financial institutions. An answer key is provided so that students can evaluate their answers after they take the exam.

The concepts in each chapter can be reinforced by using one or more of the features just listed. Professors’ use of these features will vary depending on the level of their students and the course goals. A course that focuses mostly on financial markets may emphasize tools such as the WSJ Exercises and Part 1 of the Comprehensive Project (on taking positions in securities and derivative instruments). In contrast, a course that focuses on financial insti-tutions may assign an exercise in which students must review recent annual reports (see Part 2 of the Comprehensive Project) to determine how a particular financial institution’s performance is affected by its policies, industry regulations, and economic conditions. In addition, the Internet/Excel Exercises on financial institutions give students practice in assessing the operations and performance of financial institutions.

New to this Edition: MindTap

MindTap™, Cengage’s fully online, highly personalized learning experience combines read-ings, multimedia activities, and assessments into a singular Learning Path. MindTap™ guides students through their course with ease and engagement with a learning path that includes an Interactive Chapter Reading, Algorithmic Practice Problems, and Homework Assignments powered by Aplia. These homework problems include rich explanations and instant grading, with opportunities to try another algorithmic version of the problem to bolster confidence with problem solving. Instructors can personalize the Learning Path for their students by customizing the robust suite of resources and adding their own content via apps that integrate into the MindTap™ framework seamlessly with Learning Management Systems.