Capital Markets: Institutions and Instruments / Edition 4

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Overview

Capital Markets: Institutions and Instruments, 4/e offers the most comprehensive capital market coverage available. It covers the instruments, the players, and the principles of valuation with an excellent blend of theory and practice. Topics include Overview of Market Participants and Financial Innovation, Depository Institutions, Investment Banking Firms, Stock Options Market, The Theory and Structure of Interest Rates, and The Market for Foreign Exchange and Risk Control Instruments. Appropriate for corporate treasurers.
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Editorial Reviews

Booknews
In this college textbook Fabozzi (School of Management, Yale U.) and Modigliani (Sloan School of Management, Massachusetts Institute of Technology) describe the wide range of instruments for financing, investing, and controlling risk available in today's financial markets. In addition, the text provides an overview of the asset/liability management issues faced by major institutional investors and the strategies they employ. The third edition contains the most current coverage; specific updates since publication of the second edition in 1996 are not defined. Annotation c. Book News, Inc., Portland, OR (booknews.com)
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Product Details

  • ISBN-13: 9780136026020
  • Publisher: Prentice Hall
  • Publication date: 8/13/2008
  • Series: Pearson Custom Business Resources Series
  • Edition description: New Edition
  • Edition number: 4
  • Pages: 696
  • Product dimensions: 8.00 (w) x 10.00 (h) x 1.60 (d)

Read an Excerpt

The revolution that swept through the world financial markets was aptly described in 1985 by a noted economist, Henry Kaufman:

If a modern-day Rip Van Winkle had fallen asleep twenty years ago, or for
that matter even ten years back, on awakening today, he would be astonished
as to what has happened in the financial markets. Instead of a world of iso-
lated national capital markets and a preponderance of fixed-rate financing,
he would discover a world of highly integrated capital markets, an extensive
array of financing instruments, and new methods of addressing market risk.

The purpose of this book is to describe the wide range of instruments for financing, investing, and controlling risk available in today's financial markets. New financial instruments are not created simply because someone on Wall Street believes that it would be "fun" to introduce an instrument with more "bells and whistles" than existing instruments. The demand for new instruments is driven by the needs of borrowers and investors based on their asset/liability management situation, regulatory constraints (if any), financial accounting considerations, and tax considerations. For these reasons, to comprehend the financial innovations that have occurred and are expected to occur in the future, a general understanding of the asset/liability management problem of major institutional investors is required. Therefore, in addition to coverage of the markets for all financial instruments, we provide an overview of the asset/liability management issues faced by major institutional investors and the strategies they employ.

We believe that the coverage provided inthis book on the institutional investors and financial instruments is as up-to-date as possible in a market facing rapid changes in the characteristics of the players and those making the rules as to how the game can be played. New financial instruments are introduced on a regular basis; however, armed with an understanding of the needs of borrowers and institutional investors and the attributes of existing financial instruments, the reader will be able to recognize the contribution made by a new financial instrument.

The first edition of this book was published in 1992. At the time, the book deviated in several significant ways from the traditional capital markets textbooks, notably in its coverage of derivative markets (futures, options, swaps, etc.). These markets are an integral part of the global capital market. They are not—as often categorized by the popular press and some of our less-informed congressional representatives and regulators—"exotic" markets. These instruments provide a mechanism by which market participants can control risk—borrowers can control borrowing costs and investors can control the market risk of their portfolio. It is safe to say that without the derivative markets, an efficient global capital market would be impossible. In addition, it is important to appreciate the basic principles of options not only as a stand-alone instrument, but because many financial instruments have embedded options. Also, the liabilities of many financial institutions contain embedded options. Thus, it is difficult to appreciate the complex nature of assets and liabilities without understanding the fundamentals of option theory.

Although we recognize that many colleges offer a specialized course in derivative markets, our purpose in the first edition was not to delve deeply into the various trading strategies and the nuances of pricing models that characterize such a course. Instead, we provided the fundamentals of the role of these instruments in financial markets, the principles of pricing them, and a general description of how they are used by market participants to control risk.

A special feature of the book at the time was the extensive coverage of the mortgage market and the securitization of assets. Asset securitization refers to the creation of securities whose collateral is the cash flow from the underlying pool of assets. The process of asset securitization is radically different from the traditional system for financing the acquisition of assets. By far the largest part of the securitized asset market is the mortgage-backed securities market, where the assets collateralizing the securities are mortgage loans. Securitized assets backed by non-real estate mortgage loans were a small but growing part of the market at the time of the publication of the first edition. Now they are a major sector of the capital market where financial and non-financial corporations can raise funds.

Another key feature of this book was its emphasis on the role played by foreign investors in the US. market. Although the bulk of this book covers the US. financial markets, we discuss other mayor financial markets throughout.

Finally, when we decided on the topics to cover in this book we discriminated between what belongs in a course on capital markets and what is the province of investment management. Oftentimes, because the needs of institutional investors dictate the need for financial instruments with certain investment characteristics or for a particular strategy employing a capital market instrument, we had to cross the line. The approach we took in this book makes it adaptable for a course in investment banking and as a supplement for a derivative markets course.

That was our thinking in the first edition of the book. We must admit when the publisher Prentice Hall sent the initial drafts of the manuscript to ten reviewers, the reviews were mixed. Half thought that the book was so substantially different from what was traditionally taught in a capital markets or financial markets and institutions course that it would be an error for Prentice Hall to publish the book. The other five reviewers strongly endorsed the book as a major contribution and a blueprint as to how capital markets courses would be taught in the future. Of course, Prentice Hall did publish the book in 1992, and in 1996 published the second edition.

Our model or blueprint has been followed by other textbook writers since the mid1990s. So, the unique features we claimed regarding the first edition and second edition are now common in other textbooks. However, we believe that our coverage and perspective with respect to key market sectors is still unique.

Read More Show Less

Table of Contents

SECTION I: THE PLAYERS AND MARKETS

Chapter 1: Introduction Chapter 2: Overview of Market Participants and Financial Innovation Chapter 3: Depository Institutions Chapter 4: Insurance Companies Chapter 5: Asset Management Firms Chapter 6: Investment Banking Firms Chapter 7: Primary and Secondary Markets

SECTION II: RISK AND RETURN THEORIES

Chapter 8: Risk and Return Theories: I Chapter 9: Risk and Return Theories: II

SECTION III: DERIVATIVES MARKETS

Chapter 10: Introduction to Financial Futures Markets Chapter 11: Introduction to Options Markets Chapter 12: Introduction to Swaps, Caps, and Floor Markets

SECCTION IV: THE EQUITY MARKETS

Chapter 13: Common Stock Market: I Chapter 14: Common Stock Market: II Chapter 15: Stock Options Market Chapter 16: The Market for Stock Index Products and Other Equity Derivatives

SECTION V: INTEREST RATE DETERMINATION AND BOND VALUATION

Chapter 17: The Theory and Structure of Interest Rates Chapter 18: Valuation of Debt Contracts and Their Price Volatility Characteristics Chapter 19: The Term Structure of Interest Rates

SECTION VI: DEBT MARKETS

Chapter 20: Money Markets Chapter 21: Treasury and Agency Securities Markets Chapter 22: Corporate Senior Instruments Markets: I Chapter 23: Corporate Senior Instruments Markets: II Chapter 24: Municipal Securities Markets Chapter 25: The Residential Mortgage Market Chapter 26: The Market for Residential Mortgage-Backed Securities Chapter 27: The Market for Asset-Backed Securities Chapter 28: Commercial Mortgage Loans and Commercial Mortgage-Backed Securities Chapter 29: International Bond Market Chapter 30: Interest Rate Risk Transfer Vehicles: Exchange-Traded Products Chapter 31: Interest Rate Risk Transfer Vehicles: OTC Products Chapter 32: Credit Risk Transfer Vehicles

SECTION VIII: FOREIGN EXCHANGE MARKETS

Chapter 33: The Market Foreign Exchange and Risk Control Instruments

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Preface

The revolution that swept through the world financial markets was aptly described in 1985 by a noted economist, Henry Kaufman:
If a modern-day Rip Van Winkle had fallen asleep twenty years ago, or for
that matter even ten years back, on awakening today, he would be astonished
as to what has happened in the financial markets. Instead of a world of iso-
lated national capital markets and a preponderance of fixed-rate financing,
he would discover a world of highly integrated capital markets, an extensive
array of financing instruments, and new methods of addressing market risk.

The purpose of this book is to describe the wide range of instruments for financing, investing, and controlling risk available in today's financial markets. New financial instruments are not created simply because someone on Wall Street believes that it would be "fun" to introduce an instrument with more "bells and whistles" than existing instruments. The demand for new instruments is driven by the needs of borrowers and investors based on their asset/liability management situation, regulatory constraints (if any), financial accounting considerations, and tax considerations. For these reasons, to comprehend the financial innovations that have occurred and are expected to occur in the future, a general understanding of the asset/liability management problem of major institutional investors is required. Therefore, in addition to coverage of the markets for all financial instruments, we provide an overview of the asset/liability management issues faced by major institutional investors and the strategies they employ.

We believe that the coverage provided in thisbook on the institutional investors and financial instruments is as up-to-date as possible in a market facing rapid changes in the characteristics of the players and those making the rules as to how the game can be played. New financial instruments are introduced on a regular basis; however, armed with an understanding of the needs of borrowers and institutional investors and the attributes of existing financial instruments, the reader will be able to recognize the contribution made by a new financial instrument.

The first edition of this book was published in 1992. At the time, the book deviated in several significant ways from the traditional capital markets textbooks, notably in its coverage of derivative markets (futures, options, swaps, etc.). These markets are an integral part of the global capital market. They are not—as often categorized by the popular press and some of our less-informed congressional representatives and regulators—"exotic" markets. These instruments provide a mechanism by which market participants can control risk—borrowers can control borrowing costs and investors can control the market risk of their portfolio. It is safe to say that without the derivative markets, an efficient global capital market would be impossible. In addition, it is important to appreciate the basic principles of options not only as a stand-alone instrument, but because many financial instruments have embedded options. Also, the liabilities of many financial institutions contain embedded options. Thus, it is difficult to appreciate the complex nature of assets and liabilities without understanding the fundamentals of option theory.

Although we recognize that many colleges offer a specialized course in derivative markets, our purpose in the first edition was not to delve deeply into the various trading strategies and the nuances of pricing models that characterize such a course. Instead, we provided the fundamentals of the role of these instruments in financial markets, the principles of pricing them, and a general description of how they are used by market participants to control risk.

A special feature of the book at the time was the extensive coverage of the mortgage market and the securitization of assets. Asset securitization refers to the creation of securities whose collateral is the cash flow from the underlying pool of assets. The process of asset securitization is radically different from the traditional system for financing the acquisition of assets. By far the largest part of the securitized asset market is the mortgage-backed securities market, where the assets collateralizing the securities are mortgage loans. Securitized assets backed by non-real estate mortgage loans were a small but growing part of the market at the time of the publication of the first edition. Now they are a major sector of the capital market where financial and non-financial corporations can raise funds.

Another key feature of this book was its emphasis on the role played by foreign investors in the US. market. Although the bulk of this book covers the US. financial markets, we discuss other mayor financial markets throughout.

Finally, when we decided on the topics to cover in this book we discriminated between what belongs in a course on capital markets and what is the province of investment management. Oftentimes, because the needs of institutional investors dictate the need for financial instruments with certain investment characteristics or for a particular strategy employing a capital market instrument, we had to cross the line. The approach we took in this book makes it adaptable for a course in investment banking and as a supplement for a derivative markets course.

That was our thinking in the first edition of the book. We must admit when the publisher Prentice Hall sent the initial drafts of the manuscript to ten reviewers, the reviews were mixed. Half thought that the book was so substantially different from what was traditionally taught in a capital markets or financial markets and institutions course that it would be an error for Prentice Hall to publish the book. The other five reviewers strongly endorsed the book as a major contribution and a blueprint as to how capital markets courses would be taught in the future. Of course, Prentice Hall did publish the book in 1992, and in 1996 published the second edition.

Our model or blueprint has been followed by other textbook writers since the mid1990s. So, the unique features we claimed regarding the first edition and second edition are now common in other textbooks. However, we believe that our coverage and perspective with respect to key market sectors is still unique.

Read More Show Less

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