Chapter 1
Why Study Financial Markets
and Institutions?
Why Study Financial Markets?
Debt Markets and Interest Rates
The Stock Market
The Foreign Exchange Market
Why Study Financial Institutions?
Structure of the Financial System
Financial Crises
Central Banks and the Conduct of Monetary Policy
The International Financial System
Banks and Other Financial Institutions
Financial Innovation
Managing Risk in Financial Institutions
Applied Managerial Perspective
How We Will Study Financial Markets and Institutions
Exploring the Web
Collecting and Graphing Data
Web Exercise
Concluding Remarks
◼ Overview and Teaching Tips
Before embarking on a study of financial markets and institutions, the student must be convinced that this
subject is worth studying. Chapter 1 pursues this goal by showing the student that financial markets and
institutions is an exciting field because it focuses on phenomena that affect everyday life. An additional
purpose of Chapter 1 is to provide an overview for the entire book, previewing the topics that will be
covered in later chapters. The chapter also provides the students with a guide as to how they will be studying
financial markets and institutions with a unifying, analytic framework and an applied managerial perspective.
In teaching this chapter, the most important goal should be to get the student excited about the material. I have
found that talking about the data presented in the figures helps achieve this goal by showing the students that
the subject matter of financial markets and institutions has real-world implications that they should care about.
In addition, it is important to emphasize to the students that the course will have an applied managerial
Chapter 1: Why Study Financial Markets and Institutions? 3
perspective, which they will find useful latter in their careers. Going through the web exercise is also a way of
encouraging the students to use the web to further their understanding of financial markets and institutions.
◼ Answers to End-of-Chapter Questions
2. Businesses would cut investment spending because the cost of financing this spending is now higher,
3. A change in interest rates affects the cost of acquiring funds for financial institution as well as
4. No. People who borrow to purchase a house or a car are worse off because it costs them more to finance
their purchase; however, savers benefit because they can earn higher interest rates on their savings.
6. Higher stock prices mean that consumers’ wealth is higher and so they will be more likely to increase
their spending.
8. It makes British goods more expensive relative to American goods. American businesses will find it
easier to sell their goods in the United States and abroad, and the demand for their products will rise.
9. Changes in foreign exchange rates change the value of assets held by financial institutions and thus
10. In the mid to late 1970s and the late 1980s and early 1990s, the value of the dollar was low, making
12. Savings and loan associations, mutual savings banks, credit unions, insurance companies, mutual
funds, pension funds, and finance companies.
14. The profitability of financial institutions is affected by changes in interest rates, stock prices, and
