Chapter 4
Understanding Interest Rates
In my years of teaching money and banking, I have found that students have trouble with what I
consider to be easy material because they do not understand what an interest rate is: that it is
negatively associated with the price of a bond, that it differs from the return on a bond, and that
there is an important distinction between real and nominal interest rates.
An appendix to the chapter, which can be found in MyLab Economics, provides more detail on
how interest-rate risk can be measured with the concept of McCauley’s duration. This is a basic
financial tool that is used by practitioners and so will be of great interest to students who plan
careers in the financial industry.
MyLab Chapter 4
Conflicts of Interest in the Financial Industry
Recent corporate and accounting scandals have attracted tremendous public attention and are of
particular interest to students because resulting bankruptcies have cost employees of these firms
their jobs and their pensions, and because the scandals may have hampered the efficient
functioning of the financial system.
When I teach this material, I start by emphasizing that conflicts of interest occur when people
who are supposed to act in the interests of the investing public by providing them with reliable
information instead have incentives (conflicting interests) to deceive the public to benefit
themselves and their corporate clients.
The chapter ends by describing five approaches to remedying conflicts of interest: (1) leave it to
the market, (2) regulate for transparency, (3) supervisory oversight, (4) separation of functions,
and (5) socialization of information production. Teaching the case at the end of the chapter that
applies the analysis to Sarbanes-Oxley, the Global Legal Settlement, and the Dodd-Frank Bill
of 2010 hammers home the basic concepts of the chapter and shows the students that the
asymmetric information approach developed in this chapter can help them understand how
conflicts of interest should be dealt with.