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com

Contents
Preface ................................................................................................................................................... v
Alternative Course Outlines.................................................................................................................... vii
Ancillary Items for Financial Markets and Institutions, Seventh Edition............................................... xi

Part I Introduction.......................................................................................................................... 1
Chapter 1 Why Study Financial Markets and Institutions?................................................. 2
Chapter 2 Overview of the Financial System...................................................................... 5

Part II Fundamentals of Financial Markets.................................................................................... 9

Chapter 3 What Do Interest Rates Mean and What Is Their Role in Valuation?................ 10
Chapter 4 Why Do Interest Rates Change?......................................................................... 16
Chapter 5 How Do Risk and Term Structure Affect Interest Rates?................................... 23
Chapter 6 Are Financial Markets Efficient?....................................................................... 29

Part III Fundamentals of Financial Institutions............................................................................... 33

Chapter 7 Why Do Financial Institutions Exist?................................................................. 34
Chapter 8 Why Do Financial Crises Occur and Why Are They
So Damaging to the Economy?.......................................................................... 40

Part IV Central Banking and the Conduct of Monetary Policy...................................................... 45

Chapter 9 Central Banks and the Federal Reserve System................................................. 46
Chapter 10 Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics..................... 50

Part V Financial Markets................................................................................................................. 57

Chapter 11 The Money Markets........................................................................................... 58
Chapter 12 The Bond Market............................................................................................... 63
Chapter 13 The Stock Market............................................................................................... 69
Chapter 14 The Mortgage Markets....................................................................................... 75
Chapter 15 The Foreign Exchange Market.......................................................................... 86
Chapter 16 The International Financial System.................................................................... 92

Part VI The Financial Institutions Industry..................................................................................... 97

Chapter 17 Banking and the Management of Financial Institutions..................................... 98
Chapter 18 Financial Regulation.......................................................................................... 106
Chapter 19 Banking Industry: Structure and Competition.................................................... 114
Chapter 20 The Mutual Fund Industry.................................................................................. 117
Chapter 21 Insurance Companies and Pension Funds.......................................................... 123

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iv  Contents
Chapter 22 Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms................................................................................. 128

Part VII The Management of Financial Institutions..........................................................................133

Chapter 23 Risk Management in Financial Institutions.........................................................134
Chapter 24 Hedging with Financial Derivatives....................................................................143

Chapters on the Web

Chapter 25 Savings Associations and Credit Unions.............................................................152
Chapter 26 Finance Companies.............................................................................................155

Solutions to Online Integrative Mini-Cases............................................................................................. 157

Solutions to Online Mini-Cases............................................................................................................... 163

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Preface

The demands for good teaching at business schools seem to us to have increased dramatically in recent
years. In order to aid busy instructors in this demanding environment, we have worked hard to make this
Instructor’s Manual a valuable teaching aid that will help reduce class preparation time.

The Instructor’s Manual is organized by chapter. Each chapter is broken into sections: Chapter Outline,
Overview and Teaching Tips (things we have found useful in the classroom), and Answers to End-of-
Chapter Questions and Problems. Before the chapter breakdown, and following this preface, are pedagogical
suggestions on such topics as how to organize the course and make use of the ancillaries, as well as solutions
to the mini-cases on the text’s Companion Website at www.pearsonhighered.com/mishkin_eakins. To
obtain access to other instructor resources associated with this textbook, please visit the Instructor’s
Resource Center Online at www.pearsonhighered.com/irc.

PLEASE NOTE THAT INSTRUCTORS HAVE PERMISSION TO DUPLICATE ANY OF THE

MATERIALS IN THIS INSTRUCTOR’S MANUAL FOR CLASSROOM USE.

While we believe that this Instructor’s Manual will be an extremely valuable tool in teaching the financial
markets and institutions course, we would also appreciate any suggestions or comments for improving this
supplement. Please direct all correspondence to us at the addresses below.

Frederic S. Mishkin Stanley G. Eakins

Graduate School of Business Department of Finance—School of Business
Uris Hall 817 3240 Bate Building
Columbia University East Carolina State University
New York, NY 10027 Greenville, NC 27858-4343

Frederic S. Mishkin Stanley G. Eakins

New York, New York Greenville, North Carolina

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iii  Contents

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Alternative Course Outlines

There are many different ways to teach a course on financial markets and institutions. For this reason,
the material in Financial Markets and Institutions has been arranged with flexibility in mind so that many
teaching styles can be accommodated. The following section suggests sample outlines for four main
approaches to teaching financial markets and institutions that show how the text can be adapted to each
approach and to teaching schedules. Note, however, that many variations on these outlines are possible.

 Outline for Basic Financial Markets

and Institutions Course
Core Chapters
1 Why Study Financial Markets and Institutions?
2 Overview of the Financial System
3 What Do Interest Rates Mean and What Is Their Role in Valuation?
4 Why Do Interest Rates Change?
5 How Do Risk and Term Structure Affect Interest Rates?
7 Why Do Financial Institutions Exist?
8 Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?
11 The Money Markets
12 The Bond Market
13 The Stock Market
17 Banking and the Management of Financial Institutions
18 Financial Regulation
19 Banking Industry: Structure and Competition

For a one-semester course, cover any five of the following optional chapters:
9 Central Banks and the Federal Reserve System
10 Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
14 The Mortgage Markets
15 The Foreign Exchange Market
16 The International Financial System

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20 The Mutual Fund Industry
21 Insurance Companies and Pension Funds
22 Investment Banks, Security Brokers and Dealers, and Venture Capital Firms
23 Risk Management in Financial Institutions
24 Hedging with Financial Derivatives
25 On the Web: Savings Associations and Credit Unions
26 On the Web: Finance Companies

A one-quarter course would probably only include two or three of the optional chapters.

 Outline for Financial Markets and Institutions

Course with an International Focus
Core Chapters
1 Why Study Financial Markets and Institutions?
2 Overview of the Financial System
3 What Do Interest Rates Mean and What Is Their Role in Valuation?
4 Why Do Interest Rates Change?
5 How Do Risk and Term Structure Affect Interest Rates?
7 Why Do Financial Institutions Exist?
8 Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?
11 The Money Markets
12 The Bond Market
13 The Stock Market
15 The Foreign Exchange Market
16 The International Financial System
17 Banking and the Management of Financial Institutions
18 Financial Regulation
19 Banking Industry: Structure and Competition

For a one-semester course, cover any three of the following optional chapters:
9 Central Banks and the Federal Reserve System
10 Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
14 The Mortgage Markets
20 The Mutual Fund Industry
21 Insurance Companies and Pension Funds
22 Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

 Alternative Course Outlines  ix
23 Risk Management in Financial Institutions
24 Hedging with Financial Derivatives
25 On the Web: Savings Associations and Credit Unions
26 On the Web: Finance Companies

A one-quarter course would probably only include one of the optional chapters.

 Outline for Financial Markets and Institutions Course

with a Managerial Emphasis
Core Chapters
1 Why Study Financial Markets and Institutions?
2 Overview of the Financial System
3 What Do Interest Rates Mean and What Is Their Role in Valuation?
4 Why Do Interest Rates Change?
5 How Do Risk and Term Structure Affect Interest Rates?
17 Banking and the Management of Financial Institutions
19 Banking Industry: Structure and Competition
23 Risk Management in Financial Institutions
24 Hedging with Financial Derivatives

For a one-semester course, cover any eight of the following optional chapters:
7 Why Do Financial Institutions Exist?
8 Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?
9 Central Banks and the Federal Reserve System
10 Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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
18 Financial Regulation
20 The Mutual Fund Industry
21 Insurance Companies and Pension Funds
22 Investment Banks, Security Brokers and Dealers, and Venture Capital Firms
25 On the Web: Savings Associations and Credit Unions

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

x  Alternative Course Outlines
26 On the Web: Finance Companies

A one-quarter course would probably include four or five of the optional chapters.

 Outline for Financial Markets and Institutions Course

with a Public Policy Emphasis
Core Chapters
1 Why Study Financial Markets and Institutions?
2 Overview of the Financial System
3 What Do Interest Rates Mean and What Is Their Role in Valuation?
4 Why Do Interest Rates Change?
5 How Do Risk and Term Structure Affect Interest Rates?
7 Why Do Financial Institutions Exist?
8 Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?
9 Central Banks and the Federal Reserve System
10 Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
17 Banking and the Management of Financial Institutions
18 Financial Regulation

For a one-semester course, cover any seven of the following optional chapters:
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
19 Banking Industry: Structure and Competition
20 The Mutual Fund Industry
21 Insurance Companies and Pension Funds
22 Investment Banks, Security Brokers and Dealers, and Venture Capital Firms
23 Risk Management in Financial Institutions
24 Hedging with Financial Derivatives
25 On the Web: Savings Associations and Credit Unions
26 On the Web: Finance Companies

A one-quarter course would probably only include four or five of the optional chapters.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

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Ancillary Items for Financial Markets

and Institutions, Seventh Edition

You may access all ancillary items at the Instructor’s Resource Center Online at
www.pearsonhighered.com/mishkin_eakins.

 Chapter Outlines
The chapter outlines, containing all the headings from each chapter, are a handy reference tool. Instructors
may wish to print them out from the Instructor’s Manual files in order to hand them out to students before
class, so that students will be able to follow the flow of the lecture. The chapter outlines may also be used
to make transparency masters, which can be shown at the beginning of class to outline the lecture and
motivate the students.

 Overviews of the Chapters and Teaching Tips

We have been teaching financial markets and institutions for over ten years. The overviews and teaching
tips for each chapter in the next part of the Instructor’s Manual are intended to share some of our experiences
with teaching the material in the textbook. Each of these sections lists a brief description of the contents of
the chapter, discusses the chapter’s novel features and central points to impart to students, suggests tips for
teaching the chapter that we have found useful in our classes, and provides guidance as to what material
can easily be skipped in each chapter.

 Answers and Solutions to End-of-Chapter Questions

and Quantitative Problems
The Instructor’s Manual also contains the answers to all the end-of-chapter questions and quantitative
problems. Please note that for those questions that require students to look up current data, no answers are
provided. Some instructors may want to use the end-of-chapter questions and problems in the book for
homework assignments. I have found it useful to hand out photocopies of the answers to the questions
provided in this section to the students as solution sets after they have completed their assignments; they
find them to be an invaluable study aid. The solution sets may also be printed from the Word files on the
Instructor’s Resource Center Online.

 PowerPoints

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A set of PowerPoints is available, which contains lecture notes, and the complete set of figures and tables
for the textbook. This set of PowerPoints is comprehensive and outlines the major points covered in
the text. The lecture notes have been class-tested successfully in our own classes, and we hope that other
instructors will find them just as useful a class-preparation tool as we have. Some instructors might use
these PowerPoints as their own class notes, but prefer to teach with a blackboard. As with the chapter
outlines, these PowerPoints may also be printed for student handouts.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

 Ancillary Items for Financial Markets and Institutions, Seventh Edition  xiii

 Companion Website
The Companion Website for the textbook, located at www.pearsonhighered.com/mishkin_eakins, features
Web chapters on saving associations and credit unions and another on finance companies, Web appendices,
mini-cases, animated figures, and links to relevant data sources and Federal Reserve Websites.

 Test Bank
The Test Bank, prepared by John Banko of the University of Florida, contains multiple-choice questions,
true/false questions, and short essay questions that are appropriate for use as quiz or test questions. It is
available as a set of Microsoft Word or PDF files. All of the questions from the Test Item File are also
available in computerized format for use in the TestGen software. The TestGen software is available for
both Windows and Macintosh systems.

 Study Guide
The only way to effectively learn about financial markets and institutions is by continual, and active,
application of the basic concepts developed in the textbook. To help the student in this endeavor, William
Gerken of Auburn University has revised a Study Guide to accompany the Seventh Edition, which
contains the following elements for each chapter:
 Chapter Learning Goals
 Chapter Summary
 Exercises give the students practice with using the concepts in the text by asking them to complete
matching exercises and essay questions.
 Self-Test consists of fill-in-the-blank, true/false, multiple-choice, short-answer, and problems.
 Answers to the exercises and self-test are provided for each chapter.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall

xi  Ancillary Items for Financial Markets and Institutions, Seventh Edition

© 2012 Pearson Education, Inc. Publishing as Prentice Hall