Contents in Detail
                     PART 1             Introduction 51
                                        CHAPTER 1
                                        Why Study Money, Banking, and Financial Markets?  52
                                        Why Study Financial Markets? .................................................................................................. 52
                                           Debt Markets and Interest Rates ...........................................................................................53
                                           The Stock Market .................................................................................................................53
                                        Why Study Financial Institutions and Banking? .................................................................... 55
                                           Structure of the Financial System .........................................................................................55
                                           Banks and Other Financial Institutions .................................................................................56
                                           Financial Innovation.............................................................................................................56
                                           Financial Crises ....................................................................................................................56
                                        Why Study Money and Monetary Policy? .............................................................................. 57
                                           Money and Business Cycles ..................................................................................................57
                                           Money and Inflation .............................................................................................................57
                                           Money and Interest Rates ......................................................................................................59
                                           Conduct of Monetary Policy .................................................................................................59
                                           Fiscal Policy and Monetary Policy .........................................................................................60
                                        Why Study International Finance? ........................................................................................... 61
                                           The Foreign Exchange Market ..............................................................................................62
                                           The International Financial System .......................................................................................63
                                        Money, Banking, and Financial Markets and Your Career ................................................. 64
                                        How We Will Study Money, Banking, and Financial Markets ........................................... 64
                                           Exploring the Web ...............................................................................................................65
                                        Concluding Remarks .................................................................................................................... 65
                                           Summary 65  •  Key Terms 66  •  Questions 66  •  Applied Problems 67  •   
                                             Data Analysis Problems  67   •   Web Exercises  68   •   Web References  68
                                        APPENDIX TO CHAPTER 1
                                        Defining Aggregate Output, Income, the Price Level,  
                                        and the Inflation Rate  69
                                        Aggregate Output and Income ................................................................................................. 69
                                        Real Versus Nominal Magnitudes ............................................................................................ 69
                                        Aggregate Price Level ................................................................................................................... 70
                                        Growth Rates and the Inflation Rate ....................................................................................... 71
                                        CHAPTER 2
                                        An Overview of the Financial System  72
                                        Function of Financial Markets ................................................................................................... 72
                                        Structure of Financial Markets ................................................................................................... 75
                                                                                                                        11
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                  12     Contents in Detail
                                         Debt and Equity Markets ......................................................................................................75
                                         Primary and Secondary Markets ...........................................................................................75
                                         Exchanges and Over-the-Counter Markets ............................................................................76
                                         Money and Capital Markets ..................................................................................................77
                                      Financial Market Instruments .................................................................................................... 77
                                         Money Market Instruments ..................................................................................................77
                                      Following the Financial News  Money Market Rates  78
                                         Capital Market Instruments ..................................................................................................79
                                      Following the Financial News  Capital Market Interest Rates  80
                                      Internationalization of Financial Markets .............................................................................. 81
                                      Global  Are U.S. Capital Markets Losing Their Edge?  82
                                         International Bond Market, Eurobonds, and Eurocurrencies ................................................82
                                         World Stock Markets ............................................................................................................83
                                      Function of Financial Intermediaries: Indirect Finance ...................................................... 83
                                      Following the Financial News  Foreign Stock Market Indexes  84
                                         Transaction Costs .................................................................................................................84
                                      Global  The Importance of Financial Intermediaries Relative to Securities Markets:  
                                      An International Comparison  85
                                         Risk Sharing .........................................................................................................................86
                                         Asymmetric Information: Adverse Selection and Moral Hazard ............................................86
                                         Economies of Scope and Conflicts of Interest .......................................................................88
                                      Types of Financial Intermediaries ............................................................................................. 88
                                         Depository Institutions .........................................................................................................88
                                         Contractual Savings Institutions ...........................................................................................90
                                         Investment Intermediaries ....................................................................................................91
                                      Regulation of the Financial System .......................................................................................... 92
                                         Increasing Information Available to Investors ........................................................................92
                                         Ensuring the Soundness of Financial Intermediaries .............................................................93
                                         Financial Regulation Abroad .................................................................................................95
                                         Summary 95  •  Key Terms 96  •  Questions 96  •  Applied Problems 97  •   
                                           Data Analysis Problems  98   •   Web Exercises  98   •   Web References  98
                                      CHAPTER 3
                                      What Is Money?  99
                                      Meaning of Money ....................................................................................................................... 99
                                      Functions of Money ...................................................................................................................100
                                         Medium of Exchange ..........................................................................................................100
                                         Unit of Account ..................................................................................................................101
                                         Store of Value .....................................................................................................................102
                                      Evolution of the Payments System .........................................................................................103
                                         Commodity Money ............................................................................................................103
                                         Fiat Money .........................................................................................................................103
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                                                                                                              Contents in Detail      13
                                                Checks ...............................................................................................................................103
                                                Electronic Payment .............................................................................................................104
                                                E-Money ............................................................................................................................104
                                             FYI  Are We Headed for a Cashless Society?  105
                                             APPLICATION  Will Bitcoin Become the Money of the Future? ...............................105
                                             Measuring Money .......................................................................................................................106
                                                The Federal Reserve’s Monetary Aggregates ........................................................................106
                                             Following the Financial News  The Monetary Aggregates  107
                                             FYI  Where Are All the U.S. Dollars?  108
                                                Summary 109  •  Key Terms 110  •  Questions 110  •  Applied Problems 111  •  Data Analysis 
                                                   Problems 112  •  Web Exercises 112  •  Web References 112
                       PART 2                Financial Markets  113
                                             CHAPTER 4
                                             The Meaning of Interest Rates  114
                                             Measuring Interest Rates ..........................................................................................................114
                                                Present Value ......................................................................................................................114
                                             APPLICATION Simple Present Value .........................................................................116
                                             APPLICATION How Much Is That Jackpot Worth? ..................................................116
                                                Four Types of Credit Market Instruments ...........................................................................117
                                                Yield to Maturity.................................................................................................................118
                                             APPLICATION  Yield to Maturity on a Simple Loan ..................................................118
                                             APPLICATION  Yield to Maturity and the Yearly Payment on a Fixed-Payment Loan ..120
                                             APPLICATION  Yield to Maturity and Bond Price for a Coupon Bond .....................121
                                             APPLICATION  Yield to Maturity on a Perpetuity .....................................................123
                                             APPLICATION  Yield to Maturity on a Discount Bond ..............................................124
                                             The Distinction Between Interest Rates and Returns ........................................................125
                                             Global  Negative Interest Rates? Japan First, Then the United States, Then Europe  126
                                                Maturity and the Volatility of Bond Returns: Interest-Rate Risk ...........................................128
                                                Summary ............................................................................................................................129
                                             The Distinction Between Real and Nominal Interest Rates ............................................130
                                             APPLICATION  Calculating Real Interest Rates .........................................................131
                                                Summary 133  •  Key Terms 133  •  Questions 133  •  Applied Problems 134  •  Data Analysis  
                                                   Problems 135  •  Web Exercises 135  •  Web References 135
                                             CHAPTER 4 APPENDIX
                                             Measuring Interest-Rate Risk: Duration
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                 14     Contents in Detail
                                    CHAPTER 5
                                    The Behavior of Interest Rates  136
                                    Determinants of Asset Demand ..............................................................................................136
                                       Wealth ................................................................................................................................137
                                       Expected Returns ...............................................................................................................137
                                       Risk ....................................................................................................................................137
                                       Liquidity ............................................................................................................................138
                                       Theory of Portfolio Choice .................................................................................................138
                                    Supply and Demand in the Bond Market ............................................................................139
                                       Demand Curve ...................................................................................................................139
                                       Supply Curve .....................................................................................................................140
                                       Market Equilibrium ............................................................................................................141
                                       Supply and Demand Analysis .............................................................................................142
                                    Changes in Equilibrium Interest Rates ..................................................................................142
                                       Shifts in the Demand for Bonds ..........................................................................................143
                                       Shifts in the Supply of Bonds..............................................................................................146
                                    APPLICATION  Changes in the Interest Rate Due to a Change in 
                                        Expected Inflation: The Fisher Effect ..............................................................148
                                    APPLICATION  Changes in the Interest Rate Due to a Business Cycle Expansion ....150
                                    APPLICATION  Explaining Current Low Interest Rates in Europe, Japan,  
                                        and the United States: Low Inflation and Secular Stagnation ..........................151
                                    Supply and Demand in the Market for Money:  
                                        The Liquidity Preference Framework ............................................................................152
                                    Changes in Equilibrium Interest Rates in the Liquidity Preference Framework ........155
                                       Shifts in the Demand for Money .........................................................................................155
                                       Shifts in the Supply of Money.............................................................................................155
                                    APPLICATION  Changes in the Equilibrium Interest Rate Due to  
                                        Changes in Income, the Price Level, or the Money Supply..............................156
                                       Changes in Income .............................................................................................................157
                                       Changes in the Price Level ..................................................................................................157
                                       Changes in the Money Supply ............................................................................................157
                                    Money and Interest Rates .........................................................................................................158
                                    APPLICATION  Does a Higher Rate of Growth of the Money Supply  
                                        Lower Interest Rates?........................................................................................160
                                       Summary 163  •  Key Terms 163  •  Questions 163  •  Applied Problems 164  •   
                                         Data Analysis Problems  165   •   Web Exercises  166   •   Web References  166
                                    CHAPTER 5 APPENDIX 1
                                    Models of Asset Pricing
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                                    CHAPTER 5 APPENDIX 2
                                    Applying the Asset Market Approach to a Commodity Market: The Case of Gold 
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