Contents

Preface................................................................................................................................................... v
AlternativeCourseOutlines.................................................................................................................... vii
AncillaryItemsforFinancialMarketsandInstitutions,SeventhEdition............................................... xi
PartI Introduction.......................................................................................................................... 1
Chapter1 WhyStudyFinancialMarketsandInstitutions?................................................. 2
Chapter2 OverviewoftheFinancialSystem...................................................................... 5
PartII FundamentalsofFinancialMarkets.................................................................................... 9
Chapter3 WhatDoInterestRatesMeanandWhatIsTheirRoleinValuation?................ 10
Chapter4 WhyDoInterestRatesChange?......................................................................... 16
Chapter5 HowDoRiskandTermStructureAffectInterestRates?................................... 23
Chapter6 AreFinancialMarketsEfficient?....................................................................... 29
PartIII FundamentalsofFinancialInstitutions............................................................................... 33
Chapter7 WhyDoFinancialInstitutionsExist?................................................................. 34
Chapter8 WhyDoFinancialCrisesOccurandWhyAreThey
SoDamagingtotheEconomy?.......................................................................... 40
PartIV CentralBankingandtheConductofMonetaryPolicy...................................................... 45
Chapter9 CentralBanksandtheFederalReserveSystem.................................................. 46
Chapter10 ConductofMonetaryPolicy:Tools,Goals,Strategy,andTactics..................... 50
PartV FinancialMarkets................................................................................................................. 57
Chapter11 TheMoneyMarkets........................................................................................... 58
Chapter12 TheBondMarket............................................................................................... 63
Chapter13 TheStockMarket............................................................................................... 69
Chapter14 TheMortgageMarkets....................................................................................... 75
Chapter15 TheForeignExchangeMarket.......................................................................... 86
Chapter16 TheInternationalFinancialSystem.................................................................... 92
PartVI TheFinancialInstitutionsIndustry..................................................................................... 97
Chapter17 BankingandtheManagementofFinancialInstitutions..................................... 98
Chapter18 FinancialRegulation.......................................................................................... 106
Chapter19 BankingIndustry:StructureandCompetition.................................................... 114
Chapter20 TheMutualFundIndustry.................................................................................. 117
Chapter21 InsuranceCompaniesandPensionFunds.......................................................... 123
Chapter22 InvestmentBanks,SecurityBrokersandDealers,
andVentureCapitalFirms................................................................................. 128
PartVII TheManagementofFinancialInstitutions..........................................................................133
Chapter23 RiskManagementinFinancialInstitutions.........................................................134
Chapter24 HedgingwithFinancialDerivatives....................................................................143
ChaptersontheWeb
Chapter25 SavingsAssociationsandCreditUnions.............................................................152
Chapter26 FinanceCompanies.............................................................................................155

SolutionstoOnlineIntegrativeMiniCases............................................................................................. 157
SolutionstoOnlineMiniCases............................................................................................................... 163
Preface

Thedemandsforgoodteachingatbusinessschoolsseemtoustohaveincreaseddramaticallyinrecent
years.Inordertoaidbusyinstructorsinthisdemandingenvironment,wehaveworkedhardtomakethis
InstructorsManualavaluableteachingaidthatwillhelpreduceclasspreparationtime.

TheInstructorsManualisorganizedbychapter.Eachchapterisbrokenintosections:ChapterOutline,
OverviewandTeachingTips(thingswehavefoundusefulintheclassroom),andAnswerstoEndof
ChapterQuestionsandProblems.Beforethechapterbreakdown,andfollowingthispreface,arepedagogical
suggestionsonsuchtopicsashowtoorganizethecourseandmakeuseoftheancillaries,aswellassolutions
totheminicasesonthetextsCompanionWebsiteatwww.pearsonhighered.com/mishkin_eakins.To
obtainaccesstootherinstructorresourcesassociatedwiththistextbook,pleasevisittheInstructors
ResourceCenterOnlineatwww.pearsonhighered.com/irc.

PLEASENOTETHATINSTRUCTORSHAVEPERMISSIONTODUPLICATEANYOFTHE
MATERIALSINTHISINSTRUCTORSMANUALFORCLASSROOMUSE.
WhilewebelievethatthisInstructorsManualwillbeanextremelyvaluabletoolinteachingthefinancial
marketsandinstitutionscourse,wewouldalsoappreciateanysuggestionsorcommentsforimprovingthis
supplement.Pleasedirectallcorrespondencetousattheaddressesbelow.

FredericS.Mishkin StanleyG.Eakins
GraduateSchoolofBusiness DepartmentofFinanceSchoolofBusiness
UrisHall817 3240BateBuilding
ColumbiaUniversity EastCarolinaStateUniversity
NewYork,NY10027 Greenville,NC278584343

FredericS.Mishkin StanleyG.Eakins
NewYork,NewYork Greenville,NorthCarolina
AlternativeCourseOutlines

Therearemanydifferentwaystoteachacourseonfinancialmarketsandinstitutions.Forthisreason,
thematerialinFinancialMarketsandInstitutionshasbeenarrangedwithflexibilityinmindsothatmany
teachingstylescanbeaccommodated.Thefollowingsectionsuggestssampleoutlinesforfourmain
approachestoteachingfinancialmarketsandinstitutionsthatshowhowthetextcanbeadaptedtoeach
approachandtoteachingschedules.Note,however,thatmanyvariationsontheseoutlinesarepossible.

Outline for Basic Financial Markets

and Institutions Course
Core Chapters
1 WhyStudyFinancialMarketsandInstitutions?
2 OverviewoftheFinancialSystem
3 WhatDoInterestRatesMeanandWhatIsTheirRoleinValuation?
4 WhyDoInterestRatesChange?
5 HowDoRiskandTermStructureAffectInterestRates?
7 WhyDoFinancialInstitutionsExist?
8 WhyDoFinancialCrisesOccurandWhyAreTheySoDamagingtotheEconomy?
11 TheMoneyMarkets
12 TheBondMarket
13 TheStockMarket
17 BankingandtheManagementofFinancialInstitutions
18 FinancialRegulation
19 BankingIndustry:StructureandCompetition

Foraonesemestercourse,coveranyfiveofthefollowingoptionalchapters:
9 CentralBanksandtheFederalReserveSystem
10 ConductofMonetaryPolicy:Tools,Goals,Strategy,andTactics
14 TheMortgageMarkets
15 TheForeignExchangeMarket
16 TheInternationalFinancialSystem
20 TheMutualFundIndustry
21 InsuranceCompaniesandPensionFunds
22 InvestmentBanks,SecurityBrokersandDealers,andVentureCapitalFirms
23 RiskManagementinFinancialInstitutions
24 HedgingwithFinancialDerivatives
25 OntheWeb:SavingsAssociationsandCreditUnions
26 OntheWeb:FinanceCompanies
Aonequartercoursewouldprobablyonlyincludetwoorthreeoftheoptionalchapters.

Outline for Financial Markets and Institutions

Course with an International Focus
Core Chapters
1 WhyStudyFinancialMarketsandInstitutions?
2 OverviewoftheFinancialSystem
3 WhatDoInterestRatesMeanandWhatIsTheirRoleinValuation?
4 WhyDoInterestRatesChange?
5 HowDoRiskandTermStructureAffectInterestRates?
7 WhyDoFinancialInstitutionsExist?
8 WhyDoFinancialCrisesOccurandWhyAreTheySoDamagingtotheEconomy?
11 TheMoneyMarkets
12 TheBondMarket
13 TheStockMarket
15 TheForeignExchangeMarket
16 TheInternationalFinancialSystem
17 BankingandtheManagementofFinancialInstitutions
18 FinancialRegulation
19 BankingIndustry:StructureandCompetition
Foraonesemestercourse,coveranythreeofthefollowingoptionalchapters:
9 CentralBanksandtheFederalReserveSystem
10 ConductofMonetaryPolicy:Tools,Goals,Strategy,andTactics
14 TheMortgageMarkets
20 TheMutualFundIndustry
21 InsuranceCompaniesandPensionFunds
22 InvestmentBanks,SecurityBrokersandDealers,andVentureCapitalFirms
23 RiskManagementinFinancialInstitutions
24 HedgingwithFinancialDerivatives
25 OntheWeb:SavingsAssociationsandCreditUnions
26 OntheWeb:FinanceCompanies
Aonequartercoursewouldprobablyonlyincludeoneoftheoptionalchapters.

Outline for Financial Markets and Institutions Course

with a Managerial Emphasis
Core Chapters
1 WhyStudyFinancialMarketsandInstitutions?
 2 OverviewoftheFinancialSystem
3 WhatDoInterestRatesMeanandWhatIsTheirRoleinValuation?
4 WhyDoInterestRatesChange?
5 HowDoRiskandTermStructureAffectInterestRates?
17 BankingandtheManagementofFinancialInstitutions
19 BankingIndustry:StructureandCompetition
23 RiskManagementinFinancialInstitutions
24 HedgingwithFinancialDerivatives
Foraonesemestercourse,coveranyeightofthefollowingoptionalchapters:
7 WhyDoFinancialInstitutionsExist?
8 WhyDoFinancialCrisesOccurandWhyAreTheySoDamagingtotheEconomy?
9 CentralBanksandtheFederalReserveSystem
10 ConductofMonetaryPolicy:Tools,Goals,Strategy,andTactics
11 TheMoneyMarkets
12 TheBondMarket
13 TheStockMarket
14 TheMortgageMarkets
15 TheForeignExchangeMarket
16 TheInternationalFinancialSystem
18 FinancialRegulation
20 TheMutualFundIndustry
21 InsuranceCompaniesandPensionFunds
22 InvestmentBanks,SecurityBrokersandDealers,andVentureCapitalFirms
25 OntheWeb:SavingsAssociationsandCreditUnions
26 OntheWeb:FinanceCompanies
Aonequartercoursewouldprobablyincludefourorfiveoftheoptionalchapters.

Outline for Financial Markets and Institutions Course

with a Public Policy Emphasis
Core Chapters
1 WhyStudyFinancialMarketsandInstitutions?
2 OverviewoftheFinancialSystem
3 WhatDoInterestRatesMeanandWhatIsTheirRoleinValuation?
4 WhyDoInterestRatesChange?
5 HowDoRiskandTermStructureAffectInterestRates?
7 WhyDoFinancialInstitutionsExist?
8 WhyDoFinancialCrisesOccurandWhyAreTheySoDamagingtotheEconomy?
9 CentralBanksandtheFederalReserveSystem
10 ConductofMonetaryPolicy:Tools,Goals,Strategy,andTactics
17 BankingandtheManagementofFinancialInstitutions
18 FinancialRegulation

Foraonesemestercourse,coveranysevenofthefollowingoptionalchapters:
11 TheMoneyMarkets
12 TheBondMarket
13 TheStockMarket
14 TheMortgageMarkets
15 TheForeignExchangeMarket
16 TheInternationalFinancialSystem
19 BankingIndustry:StructureandCompetition
20 TheMutualFundIndustry
21 InsuranceCompaniesandPensionFunds
22 InvestmentBanks,SecurityBrokersandDealers,andVentureCapitalFirms
23 RiskManagementinFinancialInstitutions
24 HedgingwithFinancialDerivatives
25 OntheWeb:SavingsAssociationsandCreditUnions
26 OntheWeb:FinanceCompanies

Aonequartercoursewouldprobablyonlyincludefourorfiveoftheoptionalchapters.
AncillaryItemsforFinancialMarkets
andInstitutions,SeventhEdition

YoumayaccessallancillaryitemsattheInstructorsResourceCenterOnlineat
www.pearsonhighered.com/mishkin_eakins.

Chapter Outlines
Thechapteroutlines,containingalltheheadingsfromeachchapter,areahandyreferencetool.Instructors
maywishtoprintthemoutfromtheInstructorsManualfilesinordertohandthemouttostudentsbefore
class,sothatstudentswillbeabletofollowtheflowofthelecture.Thechapteroutlinesmayalsobeused
tomaketransparencymasters,whichcanbeshownatthebeginningofclasstooutlinethelectureand
motivatethestudents.

Overviews of the Chapters and Teaching Tips

Wehavebeenteachingfinancialmarketsandinstitutionsforovertenyears.Theoverviewsandteaching
tipsforeachchapterinthenextpartoftheInstructorsManualareintendedtosharesomeofourexperiences
withteachingthematerialinthetextbook.Eachofthesesectionslistsabriefdescriptionofthecontentsof
thechapter,discussesthechaptersnovelfeaturesandcentralpointstoimparttostudents,suggeststipsfor
teachingthechapterthatwehavefoundusefulinourclasses,andprovidesguidanceastowhatmaterial
caneasilybeskippedineachchapter.

Answers and Solutions to End-of-Chapter Questions

and Quantitative Problems
TheInstructorsManualalsocontainstheanswerstoalltheendofchapterquestionsandquantitative
problems.Pleasenotethatforthosequestionsthatrequirestudentstolookupcurrentdata,noanswersare
provided.Someinstructorsmaywanttousetheendofchapterquestionsandproblemsinthebookfor
homeworkassignments.Ihavefounditusefultohandoutphotocopiesoftheanswerstothequestions
providedinthissectiontothestudentsassolutionsetsaftertheyhavecompletedtheirassignments;they
findthemtobeaninvaluablestudyaid.ThesolutionsetsmayalsobeprintedfromtheWordfilesonthe
InstructorsResourceCenterOnline.

PowerPoints
AsetofPowerPointsisavailable,whichcontainslecturenotes,andthecompletesetoffiguresandtables
forthetextbook.ThissetofPowerPointsiscomprehensiveandoutlinesthemajorpointscoveredin
thetext.Thelecturenoteshavebeenclasstestedsuccessfullyinourownclasses,andwehopethatother
instructorswillfindthemjustasusefulaclasspreparationtoolaswehave.Someinstructorsmightuse
thesePowerPointsastheirownclassnotes,butprefertoteachwithablackboard.Aswiththechapter
outlines,thesePowerPointsmayalsobeprintedforstudenthandouts.
Companion Website
TheCompanionWebsiteforthetextbook,locatedatwww.pearsonhighered.com/mishkin_eakins,features
Webchaptersonsavingassociationsandcreditunionsandanotheronfinancecompanies,Webappendices,
minicases,animatedfigures,andlinkstorelevantdatasourcesandFederalReserveWebsites.

Test Bank
TheTestBank,preparedbyJohnBankooftheUniversityofFlorida,containsmultiplechoicequestions,
true/falsequestions,andshortessayquestionsthatareappropriateforuseasquizortestquestions.Itis
availableasasetofMicrosoftWordorPDFfiles.AllofthequestionsfromtheTestItemFilearealso
availableincomputerizedformatforuseintheTestGensoftware.TheTestGensoftwareisavailablefor
bothWindowsandMacintoshsystems.

Study Guide
Theonlywaytoeffectivelylearnaboutfinancialmarketsandinstitutionsisbycontinual,andactive,
applicationofthebasicconceptsdevelopedinthetextbook.Tohelpthestudentinthisendeavor,William
GerkenofAuburnUniversityhasrevisedaStudyGuidetoaccompanytheSeventhEdition,which
containsthefollowingelementsforeachchapter:
ChapterLearningGoals
ChapterSummary
Exercisesgivethestudentspracticewithusingtheconceptsinthetextbyaskingthemtocomplete
matchingexercisesandessayquestions.
SelfTestconsistsoffillintheblank,true/false,multiplechoice,shortanswer,andproblems.
Answerstotheexercisesandselftestareprovidedforeachchapter.