SOLUTION MANUAL FOR
Financial Markets and Institutions (8th Edition) (Pearson Series in
Finance) 8th Edition by Frederic S. Mishkin, Stanley Eakins
8th Edition
,part i
introduction and overview of financial markets
chapter one
introduction
I. chapter outline
1. why study financial markets and institutions? chapter overview
2. overview of financial markets
a. primary markets versus secondary markets
b. money markets versus capital markets
c. foreign exchange markets
d. derivative security markets
e. financial market regulation
3. overview of financial institutions
a. unique economic functions performed by financial institutions
b. additional benefits fis provide to suppliers of funds
c. economic functions fis provide to the financial system as a whole
d. risks incurred by financial institutions
e. regulation of financial institutions
f. trends in the united states
4. globalization of financial markets and institutions
appendix 1a: the financial crisis: the failure of financial institutions‘ specialness
(available through mcgraw hill‘s connect. contact your mcgraw hill representative for
more information on making the appendix available to your students).
II. learning goals
1. differentiate between primary and secondary markets.
2. differentiate between money and capital markets.
3. understand what foreign exchange markets are.
4. understand what derivative securities markets are.
5. distinguish between the different types of financial institutions.
6. know the services financial institutions perform.
7. know the risks financial institutions face.
8. appreciate why financial institutions are regulated.
9. recognize that financial markets are becoming increasingly global.
copyright © 2022 mcgraw hill education. all rights reserved. no reproduction or
distribution without the prior written consent of mcgraw hill.
1-1
,III. chapter in perspective
this chapter has three major sections and one minor section. the text provides a
general overview of the major types of u.s. financial markets, focusing primarily on
terminology and descriptions of the major securities, market structures and regulators.
market microstructure is not discussed. foreign exchange transactions are also briefly
introduced. second, the chapter describes the various types of financial institutions and
explains the risks they face and the services they provide to funds‘ users and funds‘
suppliers. the financial crisis is discussed and the impact of brexit is considered. the final
section of the chapter provides statistics about the rapid growth of globalization of both
markets and institutions. an appendix covering the details of the financial crisis and the
government intervention programs, including the costs as of late 2009, is available
through mcgraw hill‘s connect. contact your mcgraw hill representative for more
information on making the appendix available to your students.
IV. key concepts and definitions to communicate to students
financial markets primary markets
initial public offerings (ipo) secondary markets
derivative security liquidity
money markets over-the-counter (otc) markets
capital markets derivative security markets
financial institutions direct transfer
price risk indirect transfer
delegated monitor asset transformers
diversify economies of scale
enterprise risk management (erm)
appendix terms include:
tarp federal reserve rescue efforts
federal stimulus programs american international group
fdic bank takeovers other financial initiatives
other housing initiatives
copyright © 2022 mcgraw hill education. all rights reserved. no reproduction or
distribution without the prior written consent of mcgraw hill.
1-1
, V. teaching notes
a. why study financial markets and institutions?
for an economy to achieve its potential growth rate, mechanisms must exist to
effectively allocate capital (a scarce resource) to the best possible uses while accounting
for the riskiness of the opportunities available. markets and institutions have been created
to facilitate transfers of funds from economic agents with surplus funds to economic
agents in need of funds. for an economy to maximize its growth potential it must create
methods that attract savers‘ excess funds and then put those funds to the best uses
possible, otherwise idle cash is not used as productively as possible. the funds transfer
should occur at as low a cost as possible to ensure maximum economic growth. two
competing alternative methods exist: direct and indirect financing. in direct financing the
ultimate funds supplier purchases a claim from the funds demander with or without the
help of an intermediary such as an underwriter. in this case, society relies on primary
markets to initially price the issue and then secondary markets to update the prices and
provide liquidity. trustees are appointed to monitor contractual obligations of issuers
and instigate enforcement actions for breach of contract terms. in indirect financing, the
funds demander obtains financing from a financial intermediary. the intermediary and the
borrower negotiate the terms and cost. the intermediary obtains funds by offering
different claims to fund suppliers. in this case the intermediary is usually responsible for
monitoring the contractual conditions of the financing agreement and perhaps updating
the cost if appropriate.
1-2
Financial Markets and Institutions (8th Edition) (Pearson Series in
Finance) 8th Edition by Frederic S. Mishkin, Stanley Eakins
8th Edition
,part i
introduction and overview of financial markets
chapter one
introduction
I. chapter outline
1. why study financial markets and institutions? chapter overview
2. overview of financial markets
a. primary markets versus secondary markets
b. money markets versus capital markets
c. foreign exchange markets
d. derivative security markets
e. financial market regulation
3. overview of financial institutions
a. unique economic functions performed by financial institutions
b. additional benefits fis provide to suppliers of funds
c. economic functions fis provide to the financial system as a whole
d. risks incurred by financial institutions
e. regulation of financial institutions
f. trends in the united states
4. globalization of financial markets and institutions
appendix 1a: the financial crisis: the failure of financial institutions‘ specialness
(available through mcgraw hill‘s connect. contact your mcgraw hill representative for
more information on making the appendix available to your students).
II. learning goals
1. differentiate between primary and secondary markets.
2. differentiate between money and capital markets.
3. understand what foreign exchange markets are.
4. understand what derivative securities markets are.
5. distinguish between the different types of financial institutions.
6. know the services financial institutions perform.
7. know the risks financial institutions face.
8. appreciate why financial institutions are regulated.
9. recognize that financial markets are becoming increasingly global.
copyright © 2022 mcgraw hill education. all rights reserved. no reproduction or
distribution without the prior written consent of mcgraw hill.
1-1
,III. chapter in perspective
this chapter has three major sections and one minor section. the text provides a
general overview of the major types of u.s. financial markets, focusing primarily on
terminology and descriptions of the major securities, market structures and regulators.
market microstructure is not discussed. foreign exchange transactions are also briefly
introduced. second, the chapter describes the various types of financial institutions and
explains the risks they face and the services they provide to funds‘ users and funds‘
suppliers. the financial crisis is discussed and the impact of brexit is considered. the final
section of the chapter provides statistics about the rapid growth of globalization of both
markets and institutions. an appendix covering the details of the financial crisis and the
government intervention programs, including the costs as of late 2009, is available
through mcgraw hill‘s connect. contact your mcgraw hill representative for more
information on making the appendix available to your students.
IV. key concepts and definitions to communicate to students
financial markets primary markets
initial public offerings (ipo) secondary markets
derivative security liquidity
money markets over-the-counter (otc) markets
capital markets derivative security markets
financial institutions direct transfer
price risk indirect transfer
delegated monitor asset transformers
diversify economies of scale
enterprise risk management (erm)
appendix terms include:
tarp federal reserve rescue efforts
federal stimulus programs american international group
fdic bank takeovers other financial initiatives
other housing initiatives
copyright © 2022 mcgraw hill education. all rights reserved. no reproduction or
distribution without the prior written consent of mcgraw hill.
1-1
, V. teaching notes
a. why study financial markets and institutions?
for an economy to achieve its potential growth rate, mechanisms must exist to
effectively allocate capital (a scarce resource) to the best possible uses while accounting
for the riskiness of the opportunities available. markets and institutions have been created
to facilitate transfers of funds from economic agents with surplus funds to economic
agents in need of funds. for an economy to maximize its growth potential it must create
methods that attract savers‘ excess funds and then put those funds to the best uses
possible, otherwise idle cash is not used as productively as possible. the funds transfer
should occur at as low a cost as possible to ensure maximum economic growth. two
competing alternative methods exist: direct and indirect financing. in direct financing the
ultimate funds supplier purchases a claim from the funds demander with or without the
help of an intermediary such as an underwriter. in this case, society relies on primary
markets to initially price the issue and then secondary markets to update the prices and
provide liquidity. trustees are appointed to monitor contractual obligations of issuers
and instigate enforcement actions for breach of contract terms. in indirect financing, the
funds demander obtains financing from a financial intermediary. the intermediary and the
borrower negotiate the terms and cost. the intermediary obtains funds by offering
different claims to fund suppliers. in this case the intermediary is usually responsible for
monitoring the contractual conditions of the financing agreement and perhaps updating
the cost if appropriate.
1-2
