Suppose that ₤1 buys $2 in new york and $2.10 in tokyo. then

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s e v e n t h e d i t i o n

Financial Markets and Institutions

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FINANCIAL MANAGEMENT Block, Hirt, and Danielsen Foundations of Financial Management Sixteenth Edition

Brealey, Myers, and Allen Principles of Corporate Finance Twelfth Edition

Brealey, Myers, and Allen Principles of Corporate Finance, Concise Second Edition

Brealey, Myers, and Marcus Fundamentals of Corporate Finance Ninth Edition

Brooks FinGame Online 5.0 Bruner, Eades, and Schill Case Studies in Finance: Managing for Corporate Value Creation Eighth Edition

Cornett, Adair, and Nofsinger Finance: Applications and Theory Fourth Edition

Cornett, Adair, and Nofsinger M: Finance Fourth Edition

DeMello Cases in Finance Third Edition

Grinblatt (editor) Stephen A. Ross, Mentor: Influence through Generations Grinblatt and Titman Financial Markets and Corporate Strategy Second Edition

Higgins Analysis for Financial Management Twelfth Edition

Ross, Westerfield, Jaffe, and Jordan Corporate Finance Eleventh Edition

Ross, Westerfield, Jaffe, and Jordan Corporate Finance: Core Principles and Applications Fifth Edition

Ross, Westerfield, and Jordan Essentials of Corporate Finance Ninth Edition

Ross, Westerfield, and Jordan Fundamentals of Corporate Finance Twelfth Edition

Shefrin Behavioral Corporate Finance: Decisions that Create Value Second Edition

INVESTMENTS Bodie, Kane, and Marcus Essentials of Investments Tenth Edition

Bodie, Kane, and Marcus Investments Eleventh Edition

Hirt and Block Fundamentals of Investment Management Tenth Edition

Jordan, Miller, and Dolvin Fundamentals of Investments: Valuation and Management Eighth Edition

Stewart, Piros, and Heisler Running Money: Professional Portfolio Management First Edition

Sundaram and Das Derivatives: Principles and Practice Second Edition

FINANCIAL INSTITUTIONS AND MARKETS Rose and Hudgins Bank Management and Financial Services Ninth Edition

Rose and Marquis Financial Institutions and Markets Eleventh Edition

Saunders and Cornett Financial Institutions Management: A Risk Management Approach Ninth Edition

Saunders and Cornett Financial Markets and Institutions Seventh Edition

INTERNATIONAL FINANCE Eun and Resnick International Financial Management Eighth Edition

REAL ESTATE Brueggeman and Fisher Real Estate Finance and Investments Sixteenth Edition

Ling and Archer Real Estate Principles: A Value Approach Fifth Edition

FINANCIAL PLANNING AND INSURANCE Allen, Melone, Rosenbloom, and Mahoney Retirement Plans: 401(k)s, IRAs, and Other Deferred Compensation Approaches Twelfth Edition

Altfest Personal Financial Planning Second Edition

Harrington and Niehaus Risk Management and Insurance Second Edition

Kapoor, Dlabay, Hughes, and Hart Focus on Personal Finance: An active approach to help you achieve financial literacy Sixth Edition

Kapoor, Dlabay, Hughes, and Hart Personal Finance Twelfth Edition

Walker and Walker Personal Finance: Building Your Future Second Edition

THE MCGRAW-HILL EDUCATION SERIES IN FINANCE, INSURANCE, AND REAL ESTATE

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s e v e n t h e d i t i o n

Financial Markets and Institutions Anthony Saunders

Stern School of Business New York University

Marcia Millon Cornett Bentley University

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FINANCIAL MARKETS AND INSTITUTIONS, SEVENTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2015, 2012, and 2009. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 LWI 21 20 19 18

ISBN 978-1-259-91971-8 MHID 1-259-91971-4

Brand Manager: Charles Synovec Product Developer: Noelle Bathurst Marketing Manager: Trina Maurer Content Project Managers: Heather Ervolino; Evan Roberts Buyer: Sandy Ludovissy Design: Matt Diamond Content Licensing Specialist: Beth Thole Cover Image: © Shutterstock / Rudy Balasko Compositor: SPi Global Printer: LSC Communications

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Names: Saunders, Anthony, 1949- author. | Cornett, Marcia Millon, author. Title: Financial markets and institutions / Anthony Saunders, Stern School of Business, New York University, Marcia Millon Cornett, Bentley University. Description: Seventh edition. | New York, NY : McGraw-Hill Education, [2019] Identifiers: LCCN 2017031881 | ISBN 9781259919718 (alk. paper) Subjects: LCSH: Securities—United States. | Stock exchanges—United States. | Financial institutions—United States. | Rate of return—United States. | Interest rates—United States. Classification: LCC HG4910 .S28 2019 | DDC 332—dc23 LC record available at https://lccn.loc.gov/2017031881

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

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To Ingo Walter: a mentor, coauthor, and friend. —TONY SAUNDERS

To my parents, Tom and Sue. —MARCIA MILLON CORNETT

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ABOUT THE AUTHORS

Anthony Saunders

Anthony Saunders is the John M. Schiff Professor of Finance

and former chair of the Department of Finance at the Stern

School of Business at New York University. Professor Saun-

ders received his PhD from the London School of Eco-

nomics and has taught both

undergraduate- and graduate-

level courses at NYU since

1978. Throughout his aca-

demic career, his teaching

and research have specialized

in financial institutions and

international banking. He has

served as a visiting professor all over the world, including

INSEAD, the Stockholm School of Economics, and the Uni-

versity of Melbourne.

Professor Saunders holds or has held positions on the

Board of Academic Consultants of the Federal Reserve

Board of Governors as well as the Council of Research

Advisors for the Federal National Mortgage Association. In

addition, Dr. Saunders has acted as a visiting scholar at the

Comptroller of the Currency and at the International Mon-

etary Fund. He is editor of the Journal of Financial Mar-

kets, Instruments and Institutions, as well as the associate

editor of a number of other journals. His research has been

published in all of the major finance and banking journals

and in several books. He has just published a new edition

of his textbook, with Dr. Marcia Millon Cornett, Financial

Institutions Management: A Risk Management Approach,

for McGraw-Hill/Irwin (ninth edition) as well as a third edi-

tion of his book on credit risk measurement for John Wiley

& Sons. Professor Saunders was ranked the most prolific

author out of more than 5,800 who have published in the

seven leading finance academic journals from 1959 to 2008

(“Most Prolific Authors in the Financial Literature, 1959–

2008,” Jean Heck and Philip Cooley).

Marcia Millon Cornett

Marcia Millon Cornett is the Robert A. and Julia E. Dorn

Professor of Finance at Bentley University. She received her

BS degree in economics from Knox College in Galesburg,

Illinois, and her MBA and PhD degrees in finance from

Indiana University in Bloomington, Indiana. Dr. Cornett has

written and published several articles in the areas of bank

performance, bank regulation, corporate finance, and invest-

ments. Articles authored by Dr. Cornett have appeared in

such academic journals as the Journal of Finance, the Jour-

nal of Money, Credit, and Banking, the Journal of Finan-

cial Economics, Financial Management, and the Journal

of Banking and Finance.