Financial Markets and Institutions

Citation

Mishkin, F. S., & Eakins, S. G. (2024). Financial Markets and Institutions (10th ed., Global ed.). Pearson.

Chapter Summary

The publisher's contents list seven parts and 24 chapter titles, followed by three further chapters available on the web. Pearson describes the book as using core principles to introduce each topic and then testing those models against real-world scenarios, and says the tenth edition reflects the aftermath of the global financial and Covid crises. The parts run from the financial system as a whole, through interest rates and financial institutions, to central banks, markets, the institutions industry and the management of risk.

Part 1, Introduction: Why Study Financial Markets and Institutions?; Overview of the Financial System

Two opening chapters motivate the subject and give a map of the financial system that the later parts fill in.

Part 2, Fundamentals of Financial Markets: What Do Interest Rates Mean and What Is Their Role in Valuation?; Why Do Interest Rates Change?; How Do Risk and Term Structure Affect Interest Rates?; Are Financial Markets Efficient?

Four chapters, each titled as a question, cover the meaning of interest rates and their role in valuation, why rates move, how risk and the term structure shape them, and whether markets are efficient. This part is the base for the market chapters that follow.

Part 3, Fundamentals of Financial Institutions: Why Do Financial Institutions Exist?; Why Do Financial Crises Occur and Why Are They So Damaging to the Economy?

The part asks why intermediaries exist and why financial crises happen and do so much damage, setting up the institutional chapters in Part 6.

Part 4, Central Banking and the Conduct of Monetary Policy: Central Banks and the Federal Reserve System; Conduct of Monetary Policy

Two chapters cover the structure of central banks, with the Federal Reserve as the named example, and the conduct of monetary policy.

Part 5, Financial Markets: The Money Markets; The Bond Market; The Stock Market; The Mortgage Markets; The Foreign Exchange Market; The International Financial System

Six chapters survey the main markets in turn, from short-term money markets and bonds to stocks, mortgages and foreign exchange, ending with the international financial system.

Part 6, The Financial Institutions Industry: Banking and the Management of Financial Institutions; Financial Regulation; Banking Industry: Structure and Competition; The Mutual Fund Industry; Insurance Companies and Pension Funds; Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Six chapters describe the institutions: banks and their management, regulation, industry structure, mutual funds, insurance and pensions, and investment banks, brokers, dealers and venture capital.

Part 7, The Management of Financial Institutions: Risk Management in Financial Institutions; Hedging with Financial Derivatives

The final part treats risk management in institutions and hedging with financial derivatives.

Chapters on the Web

The contents list three chapters outside the printed book: Financial Crises in Emerging Market Economies; Savings Associations and Credit Unions; and Finance Companies.

Key Concepts

Parts 1–3: The System and Its Fundamentals

• Interest rates and valuation: what rates mean and how they enter valuation.
• Risk and term structure of interest rates: how risk and maturity shape rates.
• Market efficiency: the question taken up in the fourth chapter of Part 2.
• Financial crises: why they occur and why they are damaging.

Parts 4–7: Policy, Markets and Institutions

• Central banking and monetary policy: the Federal Reserve as the book's named example.
• Money, bond, stock, mortgage and foreign exchange markets: the markets of Part 5.
• Financial regulation: a chapter of its own in Part 6.
• Risk management and hedging with derivatives: the focus of Part 7.

Critical Analysis

Strengths

• A question-driven structure. Seven of the first eight chapters are titled as questions, such as why rates change and whether markets are efficient, which gives each of them a clear problem to answer.
• Markets and institutions together. Part 5 covers the markets, Part 6 the institutions that operate in them, and Part 7 how those institutions manage risk, so the same system is seen from several sides.
• Explicit treatment of crises and policy. The contents give crises their own chapter in Part 3 and place central banking and monetary policy in a dedicated part, and Pearson says the edition reflects the post-crisis and Covid period.
• Principle first, then application. The publisher describes using core principles to introduce topics and examining the models through real-world scenarios and empirical applications.

Limitations

• US-centred policy examples. The central banking chapters are titled around the Federal Reserve System, so readers studying other jurisdictions will need local sources on monetary policy and regulation.
• Little formal portfolio theory. The contents do not include chapters on portfolio theory or asset pricing models, so students wanting that need an investments text.
• Material outside the printed book. Three chapters, including savings associations and credit unions and emerging-market crises, are on the web, so the printed book is not the whole text.
• Derivatives in one chapter. Derivatives appear as hedging tools within the last part, rather than as a free-standing treatment of pricing.

Where It Fits in the Course

Among the books on investments and financial markets, this is the institutional and system-level text. Malkiel's A Random Walk Down Wall Street is an accessible account for general readers of how markets price securities and why low-cost diversified investing is argued for, and Jordan, Miller and Dolvin's Fundamentals of Investments is an introductory text on how securities are traded, valued and combined into portfolios. Mishkin and Eakins sits beside them as the account of the financial system around those decisions.

Bodie, Kane and Marcus's Investments is a graduate-level text built on portfolio theory, equilibrium pricing, fixed income, equity valuation and derivatives, and is the usual next step for readers who want pricing and portfolio construction. The fixed income, credit risk and derivatives books on the list are specialist, graduate-level treatments that go much deeper than Part 7 and the bond chapters here.

How to Use This Book

The book suits second- or third-year students on courses in financial markets, financial institutions, money and banking or investments, and readers heading into banking or regulation. A principles of economics course is a reasonable background for the early chapters on interest rates and market efficiency.

A practical plan:

• Core: Parts 1 and 2 first, because the later parts rely on interest rates, risk and term structure, and efficiency.
• Policy: Parts 3 and 4 for crises, central banking and monetary policy.
• Markets or institutions: Part 5 for a markets course, or Part 6 for a banking and institutions course; the two can be read in either order once the fundamentals are secure.
• Optional: Part 7 for risk management and derivatives, and the web chapters for emerging-market crises and the smaller institutions.