Financial Markets, Banking, and Monetary Policy

387 Pages·2014·2.98 MB·English

by  Thomas D. Simpson

Financial
Markets,
Banking, and
MMoonneettaarryy PPoolliiccyy
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Financial
Markets,
Banking, and
MMoonneettaarryy PPoolliiccyy
THOMAS D. SIMPSON
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Copyright © 2014 by Thomas D. Simpson. All rights reserved.
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Library of Congress Cataloging-in-Publication Data:
Simpson, Thomas D., 1942-
Financial markets, banking, and monetary policy / Thomas D. Simpson.
pages cm. — (Wiley fi nance series)
Includes index.
ISBN 978-1-118-87223-9 (hardback); ISBN 978-1-118-872468 (ePDF); ISBN 978-1-118-87205-5 (ePub)
1. Capital market. 2. Banks and banking. 3. Monetary policy. 4. Finance. I. Title.
HG4523.S568 2014
332—dc23
2014012264
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
To my partner in life, best friend, and wife—Cindy.

CCoonntteennttss
Preface xvii
CHAPTER 1
Introduction 1
What You Will Learn in This Chapter 1
Overview 1
Where We Are Going in This Book 2
Contributions Made by the Financial System 4
Transfers of Resources from Surplus to Defi cit Units 4
Other Contributions 8
Recurring Themes in the Chapters Ahead 11
Resources 12
CHAPTER 2
Overview of the Financial System 17
What You Will Learn in This Chapter 17
Introduction 17
Features of an Effective Financial System 17
Direct Methods of Finance 18
Investment Banks 19
Debt versus Equity 20
Money versus Capital Markets 21
Asymmetric Information 21
Adverse Selection 21
Moral Hazard 22
Indirect Methods of Finance 22
Primary versus Secondary Markets 27
Primary-Market Transactions 27
Secondary-Market Transactions 28
Trading Platforms 29
Brokers 29
CHAPTER 3
The Special Role of Commercial Banks 33
What You Will Learn in This Chapter 33
Background 33
Commercial Bank Balance Sheet 34
Assets 35
Liabilities 35
Net Worth (Capital) 36
vii
viii CONTENTS
Payment System and Money 36
Commercial Banks and the Payment System 36
Payment System Infrastructure 40
Credit and Stored Value Cards 40
Payments Media in the Money Stock 41
Velocity (Turnover of Money) 42
Liquidity Provision 44
Dealing with Asymmetric Information 46
Maturity Transformation 46
The Safety Net and Regulatory Policy 47
CHAPTER 4
The Pricing of Financial Assets 55
What You Will Learn in This Chapter 55
Background 55
Present Value 56
Value of a Single Future Payment 57
Value of a Coupon Security 58
Other Applications 59
Solving for Yield to Maturity 59
Solving for Fixed Payments 60
The Special Case of a Consol 61
Maturity and Price Sensitivity 61
Holding Periods versus Maturities 63
Return versus Yield 63
Duration 64
Nominal versus Real Yields 66
Appendix A: Variations of the Valuation Relationship 69
Appendix B: Solutions Using a Financial Calculator 70
Future Value 70
Future Value—A Higher Interest Rate 70
Present Value of Single Cash Flow 71
Lottery Choice 71
Current Price of a Coupon Security 71
Price of an Aasset Providing Uneven
Cash Flows 71
Yield to Maturity 72
CHAPTER 5
Factors Affecting Yields 75
What You Will Learn in This Chapter 75
Background 75
The Term Structure of Interest Rates 76
The Expectations Hypothesis 77
The Term Premium Hypothesis 81
Market Segmentation Hypothesis 83
Implicit Forward Rates 84
The Role of the Term Structure 85