CHAPTER ONE
WHY STUDY FINANCIAL MARKETS AND INSTITUTIONS?
REQUIREMENTS：
Chapter one shows the student that financial markets and institutions is an exciting field because it focuses on phenomena that affect everyday life. The students need to have an overview for the entire book, previewing the topics that will be covered in later chapters.
STRUCTURE：
Why study Financial Markets?
Debt Market and Interest Rates
The Stock Market
The Foreign Exchange Market
Why study Financial Institutions?
Central Banks and the Conduct of Monetary Policy
Structure of the Financial System
Banks and Other Financial Institutions
Managing Risk in Financial Institutions
How we will study Financial Markets?
KEY POINTS:
Financial markets, Foreign exchange market, Financial intermediaries
CHAPTER TWO
OVERVIEW OF THE FINANCIAL SYSTEM
REQUIREMENTS：
Chapter 2 is an introductory chapter that contains the background information on the structure and operation of financial markets that is needed in later chapters of the book. The most important point to transmit to the student is that financial markets and financial intermediaries are crucial to a well-functioning economy because they channel funds from those who do not have a productive use for them to those who do.
STRUCTURE：
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
Internationalization of Financial Markets
International Bond Market, Eurobonds and Eurocurrencies
World Stock Markets
Function of Financial Intermediaries
Transactions Costs
Asymmetric Information: Adverse Selection and Moral Hazard
Financial Institutions
Depository Institutions
Contractual Savings Institutions
Investment Intermediaries
Regulation of the Financial System
Increasing Information Available to Investors
Ensuring the Soundness of Financial Intermediaries
Improving Control of Monetary Policy
Financial Regulation Abroad
KEY POINTS:
OTC markets, Eurobond, Eurocurrencies, Eurodollars, Transaction costs, asymmetric information, adverse selection, moral hazard
CHAPTER THREE
UNDERSTANDING INTEREST RATES
REQUIREMENTS：
The student will understand the interest rate is negatively associated with the price of a bond, that it differs from the return on a bond, and that there is an important distinction between real and nominal interest rates.
STRUCTURE：
Measuring Interest Rates
Present Value
Yield to Maturity
Other Measures of Interest Rates
Current Yield
Yield on a Discount Basis
The Distinction Between Real And Nominal Interest rates
The Distinction Between Interest Rates and Returns
Maturity and the Volatility of Bond Returns: Interest-Rate Risk
Reinvestment Risk
The Practicing Financial Institution Manager: Calculating Duration to Measure Interest-Rate Risk
Calculating Duration
Duration and Interest-Rate Risk
KEY POINTS:
discount bond, present value, yield to maturity, coupon bond, current yield, real interest rate, rate of return, interest rate risk, duration
CHAPTER FOUR
THE BEHAVIOR OF INTEREST RATES
REQUIREMENTS：
The student will develop their intuition through this chapter. The exercise will give them good practice in developing their analytic abilities. The rest of Chapter 4 will lays out two partial equilibrium approaches to the determination of interest rates: the loanable funds framework and the liquidity preference framework.
STRUCTURE：
Determinants of Asset Demand
Wealth
Expected Returns
Risk
Liquidity
Summary
Benefits of Diversification
Loanable Funds Framework: Supply an Demand in the Bond Market
Demand-Curve
Supply-Curve
Market Equilibrium
WORKS IN PROGRESS...
Supply and Demand Analysis
Changes in Equilibrium Interest Rates
Shifts in the Demand for Bonds
Shifts in the Supply of Bonds
Changes in Expected Inflation: The Fischer Effect
Business Cycle Expansion
Liquidity Preference Framework: Supply and Demand in the Market for Money
Changes in Equilibrium Interest Rates
Changes in Income
Changes in the Price Level
Changes in the Money Supply
Does a Higher Rate of Growth of the Money Supply Lower Interest Rates?
The Practicing Financial Institutions Manager: Profiting from Interest-rate Forecasts?
KEY POINTS:
expected return, liquidity, demand curve, supply curve, market equilibrium, business cycle, income effect
CHAPTER FIVE
THE RISK AND TERM STRUCTURE OF INTEREST RATES
REQUIREMENTS：
Chapter 5 applies the tools the student learned in Chapter 4 to understanding why and how various interest rates differ. In courses that emphasize financial markets, this chapter is important because students are curious about the risk and term structure of interest rates. A particularly attractive feature of this chapter is that it gives students a feel for the interaction of data and theory.
STRUCTURE：
Risk Structure of Interest Rates
Default Risk
Liquidity
Income Tax Considerations
Term Structure of Interest Rates
Pure Expectations Theory
Market Segmentation Theory
Liquidity Premium Theory
Evidence on the Term Structure
KEY POINTS:
default risk, liquidity, yield curve, term structure of interest rates
CHAPTER SIX
THE THEORY OF EFFICIENT CAPITAL MARKETS
REQUIREMENTS：
The students will understand the important development in finance theory that has far-reaching implications is the theory of rational expectations, which is called the theory of efficient capital markets when it is applied to financial markets. When provided with a graphic example like that used in the text, students have no trouble understanding the theory of rational expectations, which is really just good common sense.
STRUCTURE：
Theory of Rational Expectations
Formal Statement of the Theory
Rational Behind the Theory
Implications of the Theory
Efficient Markets Theory: Rational Expectations in Financial Markets
Rationale Behind the Theory
Stronger VERSION of Efficient Markets Theory
Evidence on Efficient Markets Theory
Evidence in Favor of Market Efficiency
Evidence Against Market Efficiency
Overview of the Evidence on Efficient Markets Theory
The Practicing Financial Institution Manager: Practical Guide to Investing in the Stock Market
How Valuable are Published Reports by Investment Advisors?
Should You Be Skeptical of Hot Tips?
Do Stock Prices Always Rise When There is Good News?
Efficient Markets Prescription for the Investor
KEY POINTS:
adaptive expectations, market fundamentals, rational expectations, mean reversion, unexploited profit opportunity, efficient markets theory, random walk
CHAPTER SEVEN
THE STRUCTURE OF CENTRAL BANKS AND THE FEDERAL RESERVE SYSTEM
REQUIREMENTS：
In this chapter we look at the institutional structure of major central banks and particularly focus on the United States. The students need to understand the structure of the Fed and how the Fed operates. With this information, the students will be more able to comprehend the actual conduct of monetary policy described in the following chapters.
STRUCTURE：
Origin of the Federal Reserve System
Formal Structure of the Federal Reserve System
Federal Reserve Banks
Member Banks
Board of Governors of the Federal Reserve System
Federal Open Market Committee (FOMC)
The FOMC Meeting
Informal Structure of the Federal Reserve System
How Independent is the Fed?
Structure and Independence of Foreign Central Banks
Bank of Canada
Bank of England
Bank of Japan
European Central Bank
The Trend Toward Greater Independence
Explaining the Central Bank Behavior
Should the Fed be Independence?
The Case for Independence
The Case Against Independence
Central Bank Independence and Macroeconomic Performance in Seventeen Countries
KEY POINTS
Board of Governors of the Federal Reserve System, Federal Open Market Committee (FOMC), Federal Reserve banks, open market operations, political business cycle
CHAPTER 8
CONDUCT OF MONETARY POLICY:TOOLS,GOALS,AND TARGETS
REQUIREMENTS：
The students should know the Federal Reserve’s balance sheet, the tools, goals of monetary policy, and can analyze the market for reserves, how monetary policy affects the federal funds rate. Then the students should make it clear that how the fed uses its tools in theory and in practice and understand two basic strategies for monetary policy: monetary targeting and inflation targeting.
STRUCTURE：
The Federal Reserve’s Balance Sheet
Liabilities
Assets
Open Market Operations
Discount Lending
The Market for Reserves and the Federal Funds Rate
Supply and Demand in the Market for Reserves
How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate
Tools of Monetary Policy
Open Market Operations
A Day at the Trading Desk
Discount Policy
Operations of the Discount Window
Lender of Last Resort
Announcement Effect
Reserve Requirements
Advantages of Open market Operations over the Other Tools
Goals of Monetary Policy
High Employment
Economic Growth
Price Stability
Interest-Rate Stability
Stability in Financial Markers
Conflict Among Goals
Central Bank Strategy : Use of Targets
Choosing the Targets
Criteria for Choosing Intermediate Targets
Criteria for Choosing Operating Targets
Fed Policy Procedures : Historical Perspective
The Early Years: Discount Policy as the Primary Tool
Discovery of Open Market Operations
The Great Depression
War Finance and the Pegging of Interest Rates: 1942-1951
Targeting Money Market Conditions: The 1950s and 1960s
Targeting Monetary Aggregates: The 1970s
New Fed Operating Procedures: October 1979-October 1982
Deemphasis of Monetary Aggregates: October 1982-Early 1990s
Federal Funds Targeting Again: Early 1990s and Beyond
International Considerations
Monetary Targeting in Other Countries
The New International Trend in Monetary Policy Strategy: Inflation Targeting
The Practicing Financial Institution Manager : Using a Fed Watcher
KEY POINTS:
open market operations, discount rate, discount window, federal funds rate, reserve requirements, intermediate target, operating target, international policy coordination
CHAPTER 9
THE MONEY MARKETS
REQUIREMENTS:
This chapter explores the institutional feature of the money markets. The students should know why money markets are needed and the purpose of them to the government, firms, financial institutions, and individuals. Then the students need to understand the money market instruments: treasury bills, federal funds, CDs, commercial paper, Eurodollars, and the characteristics of the instruments: interest rates, maturity, liquidity.
STRUCTURE:
The Money Markets Defined
Why Do We Need Money Markets?
Cost Advantages
The Purpose of the Money Markets
Who Participates in the Money Markets?
U.S. Treasury Department
Federal Reserve System
Commercial Banks
Businesses
Investment and Securities Firms
Individuals
Money Market Instruments
Treasury Bills
Federal Funds
Repurchase Agreements
Negotiable Certificates of Deposit
Commercial Paper
Banker’s Acceptances
Eurodollars
Comparing Money Market Securities
Interest Rates
Liquidity
Money Market Mutual Funds
History of Money Market Mutual Funds
Description of Money Market Mutual Funds
MMMF Risk
Current Trends in MMMFs
KEY POINTS:
bearer instrument, money market , money market instrument, LIBOR, LIBID, treasury bill , repurchase agreements , negotiable certificates of deposit , commercial paper , banker’s acceptance , money market mutual funds
CHAPTER 10
THE CAPITAL MARKETS
REQUIREMENTS:
At first the students will know the purpose of and the participants in the capital market. Then the students will get a better understanding of two categories of capital markets: bonds and stocks and the different types of Treasury securities, the difference between stocks which represent ownership and bonds which represent no ownership to the company.
STRUCTURE:
Purpose of the Capital Market
Capital Market Participants
Capital Market Trading
Organized Securities Exchanges
Over-the-Counter Markets
Capital Market Securities: Bonds
Treasury Bonds
Application: Interest-Rate Risk in Bond Investment
Treasury Bond Interest Rates
Treasury Strips
Agency Bonds
Municipal Bonds
Risk in the Municipal Bond Market
Corporate Bonds
Characteristics of Corporate Bonds
Types of Corporate Bonds
Financial Guarantees for Bonds
Trends in the Bond Market
Capital Market Securities: Stock
Common Stock Versus Preferred Stock
Application: The Valuation of Common Stock
Stock Market Indexes
Buying Foreign Stock
Public Issues of Stocks and Bonds
Using Investment Bankers
Private Placement
KEY POINTS:
capital market , capital market participants , capital market trading , capital market securities , initial public offering(IPO), STRIPS, financial guarantee, American depository receipts(ADRs), syndicate , underwriting
CHAPTER 11
THE MORTGAGE MARKETS
REQUIREMENTS:
The students should understand the definition of the mortgage markets and mortgage loans. Then the students will get a full understanding of the interest rates on mortgages and how they are determined for different types of rates, terms, and discount points. The mortgage-backed security is an important concept, so the students should hold the types and characteristics of them.
STRUCTURE:
What are Mortgage?
Characteristics of the Residential Mortgage
Mortgage Interest Rates
Loan Terms
Mortgage Loan Amortization
Types of Mortgage Loans
Insured and Conventional Mortgages
Fixed-and adjustable-rate Mortgages
Other Types of Mortgages
Mortgage-lending Institutions
Loan Servicing
Secondary Mortgage Market
Mortgage Backed Securities
What is a Mortgage-Backed Security?
Types of Pass-through Securities
Mortgage-Backed Security Clearing Corporation
The Impact of Securitized Mortgages in the Mortgage Market
KEY POINTS:
mortgage, amortized, insured mortgage, private mortgage insurance, discount points, down payment, conventional mortgage, collateralized mortgage obligation, mortgage-backed security, securitized mortgage, mortgage pass-through
CHAPTER 12
THE FOREIGN EXCHAGE MARKETS
REQUIREMENTS:
The students should understand the behavior in the foreign exchange market by using a modern asset-market approach to exchange rate determination. To help students achieve an intuitive grasp of how the expected return on domestic and foreign deposits schedules shift, tell them to put themselves in the shoes of an investor who is thinking about putting his money into foreign or domestic deposits.
STRUCTURE:
Foreign Exchange Market
What are Foreign Exchange Rates?
Why are Exchange Rates Important?
How is Foreign Exchange Traded?
Exchange Rates in the Long Run
Law of One Price
Theory of Purchasing Power Parity: Why the Theory of Purchasing Power Parity
Cannot Fully Explain Exchange Rates?
Factors That Affect Exchange Rates in the Long Run
Exchange Rates in the Short Run
Comparing Expected Returns on Domestic and Foreign Deposits
Interest Parity condition
Equilibrium in the Foreign Exchange Market
Explaining changes in Exchange Rates
Shift in the Expected-Return Schedule for Foreign Deposits
Shift in the Expected-Return Schedule for Domestic Deposits
Changes in Domestic Interest Rates
Changes in the Money Supply
Exchange Rate Overshooting
KEY POINTS:
foreign exchange market, appreciation, depreciation, effective exchange rate index, theory of purchasing power parity, interest parity condition, law of one price, exchange rate overshooting
CHAPTER 13
THE INTERNATIONAL FINANCIAL SYSTEM AND MONETARY POLICY
REQUIREMENTS:
The students should make it clear why international financial transactions have important implication for financial institutions and the conduct of monetary policy. Then the students should know how foreign exchange market intervention affects the exchange rate, a country’s international reserves and the money supply, and how monetary policy can be affected by international financial transactions.
STRUCTURE:
Intervention in the Foreign Exchange Market
Foreign Exchange Intervention and the Money Supply
Unsterilized Intervention
Sterilized Intervention
Balance of Payments
Current Account
Capital Account
Official Reserve Transactions Balance
Methods of Financing the Balance of Payments
Evolution of the International Financial System
Gold Standard
Bretton Woods System and the IMF
Managed Float
European Monetary System
The Practicing Financial Institution Manager: Profiting from a Foreign Exchange Crisis
International Considerations and Monetary Policy
Direct Effects of the Foreign Exchange Market of the Money Supply
Balance-of-Payments Considerations
Exchange Rate Considerations
KEY POINTS:
balance of payments, gold standard, special drawing rights, unsterilized intervention, sterilized intervention, foreign exchange intervention, Bretton woods System, managed float regime, fixed exchange rate regime, reserve currency, international reserves
