Finance, Banking, and Money
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Finance, Banking, and Money v. 1.0 This is the book Finance, Banking, and Money (v. 1.0). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/ 3.0/) license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This book was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz (http://lardbucket.org) in an effort to preserve the availability of this book. Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. 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You can browse or download additional books there. ii Table of Contents About the Authors................................................................................................................. 1 Acknowledgments................................................................................................................. 3 Preface..................................................................................................................................... 4 Chapter 1: Money, Banking, and Your World ................................................................. 5 Dreams Dashed............................................................................................................................................... 6 Hope Springs .................................................................................................................................................. 9 Suggested Browsing..................................................................................................................................... 11 Suggested Reading ....................................................................................................................................... 12 Chapter 2: The Financial System ..................................................................................... 13 Evil and Brilliant Financiers?...................................................................................................................... 14 Financial Systems......................................................................................................................................... 16 Asymmetric Information: The Real Evil .................................................................................................... 19 Financial Markets......................................................................................................................................... 22 Financial Intermediaries ............................................................................................................................. 26 Competition Between Markets and Intermediaries ................................................................................. 30 Regulation..................................................................................................................................................... 32 Suggested Reading ....................................................................................................................................... 34 Chapter 3: Money ................................................................................................................ 35 Of Love, Money, and Transactional Efficiency.......................................................................................... 36 Better to Have Had Money and Lost It Than to Have Never Had Money at All .....................................41 A Short History of Moolah .......................................................................................................................... 44 Commodity and Credit Monies ................................................................................................................... 48 Measuring Money ........................................................................................................................................ 54 Suggested Reading ....................................................................................................................................... 56 Chapter 4: Interest Rates................................................................................................... 57 The Interest of Interest ............................................................................................................................... 58 Present and Future Value............................................................................................................................ 59 Compounding Periods ................................................................................................................................. 65 Pricing Debt Instruments............................................................................................................................ 67 What’s the Yield on That? ........................................................................................................................... 72 Calculating Returns ..................................................................................................................................... 76 Inflation and Interest Rates ........................................................................................................................ 79 Suggested Reading ....................................................................................................................................... 82 iii Chapter 5: The Economics of Interest-Rate Fluctuations........................................... 83 Interest Rate Fluctuations........................................................................................................................... 84 Shifts in Supply and Demand for Bonds .................................................................................................... 88 Liquidity Preference .................................................................................................................................... 96 Predictions and Effects.............................................................................................................................. 101 Suggested Reading ..................................................................................................................................... 105 Chapter 6: The Economics of Interest-Rate Spreads and Yield Curves ................. 106 A Short History of Interest Rates ............................................................................................................. 107 Interest-Rate Determinants I: The Risk Structure.................................................................................. 110 The Determinants of Interest Rates II: The Term Structure .................................................................116 Suggested Reading ..................................................................................................................................... 122 Chapter 7: Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities ............................................................................................................ 123 The Theory of Rational Expectations....................................................................................................... 124 Valuing Corporate Equities....................................................................................................................... 128 Financial Market Efficiency ...................................................................................................................... 134 Evidence of Market Efficiency .................................................................................................................. 140 Suggested Reading ..................................................................................................................................... 147 Chapter 8: Financial Structure, Transaction Costs, and Asymmetric Information ........................................................................................................................ 148 The Sources of External Finance .............................................................................................................. 149 Transaction Costs, Asymmetric Information, and the Free-Rider Problem ........................................152 Adverse Selection....................................................................................................................................... 156 Moral Hazard.............................................................................................................................................. 162 Agency Problems........................................................................................................................................ 166 Suggested Reading ....................................................................................................................................