Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives -- Contents -- Preface -- Acknowledgments -- Chapter 1: An Introduction to Financial Institutions, Instruments, and Markets -- The Role of an Economic System -- A Command Economy -- A Market Economy -- Classification of Economic Units -- An Economy's Relationship with the External World -- The Balance of Trade -- The Current Account Balance -- Financial Assets -- Primary Markets and Secondary Markets -- Exchanges and OTC Markets -- Brokers and Dealers -- The Need for Brokers and Dealers -- Trading Positions -- The Buy Side and the Sell Side -- Investment Bankers -- Direct and Indirect Markets -- Mutual Funds -- Money and Capital Markets -- The Eurocurrency Market -- The International Bond Market -- Globalization of Equity Markets -- Dual Listing -- Fungibility -- Risk -- After the Trade: Clearing and Settlement -- Dematerialization and the Role of a Depository -- Custodial Services -- Globalization: The New Mantra -- Chapter 2: Mathematics of Finance -- Interest Rates -- The Real Rate of Interest -- The Fisher Equation -- Simple Interest -- Compound Interest -- Properties -- A Symbolic Derivation -- Principle of Equivalency -- Continuous Compounding -- Future Value -- Present Value -- Handling a Series of Cash Flows -- The Internal Rate of Return -- Evaluating an Investment -- Annuities: An Introduction -- Perpetuities -- The Amortization Method -- Amortization with a Balloon Payment -- The Equal Principal Repayment Approach -- Types of Interest Computation -- Loans with a Compensating Balance -- Chapter 3: Equity Shares, Preferred Shares, and Stock Market Indexes -- Introduction -- Par Value versus Book Value -- Voting Rights -- Statutory versus Cumulative Voting -- Proxies -- Dividends -- Dividend Yield -- Dividend Reinvestment Plans.

Stock Dividends -- Treasury Stock -- Splits and Reverse Splits -- Costs Associated with Splits and Stock Dividends -- Preemptive Rights -- Interpreting Stated Ratios -- Handling Fractions -- Physical Certificates versus Book Entry -- Tracking Stock -- Report Cards -- Types of Stocks -- Risk and Return and the Concept of Diversification -- Preferred Shares -- Callable Preferred Stock -- Convertible Preferred Shares -- Cumulative Preferred Shares -- Adjustable Rate Preferred Shares -- Participating Preferred Shares -- Dividend Discount Models -- A General Valuation Model -- The Constant Growth Model -- The Two-Stage Model -- The Three-Stage Model -- The H Model -- Stock Market Indexes -- Price-Weighted Indexes -- Changing the Divisor -- The Importance of Price -- Value-Weighted Indexes -- Changing the Base-Period Capitalization -- Equally Weighted Indexes -- Tracking Portfolios -- The Free-Floating Methodology -- Well-Known Global Indexes -- Margin Trading and Short Selling -- Terminology -- Maintenance Margin -- Regulation T and NYSE and NASD Rules -- Short Selling -- Chapter 4: Bonds -- Valuation of a Bond -- Par, Premium, and Discount Bonds -- Evolution of the Price -- Zero-Coupon Bonds -- Valuing a Bond in between Coupon Dates -- Day-Count Conventions -- Actual-Actual -- The Treasury's Approach -- Corporate Bonds -- Accrued Interest -- Yields -- Taxable-Equivalent Yield -- Credit Risk -- Bond Insurance -- Equivalence with Zero-Coupon Bonds -- The Yield Curve and the Term Structure -- Bonds with Embedded Options -- Price Volatility -- Duration and Price Volatility -- Dollar Duration -- Convexity -- Treasury Auctions -- When Issued Trading -- Price Quotes -- Bond Futures -- STRIPS -- Chapter 5: Money Markets -- Introduction -- Market Supervision -- The Interbank Market -- Interest-Computation Methods -- Term Money Market Deposits -- Federal Funds.

Correspondent Banks: Nostro and Vostro Accounts -- Payment Systems -- Fed Funds and Reserve Maintenance -- Treasury Bills -- Yields on Discount Securities -- Discount Rates and T-Bill Prices -- Primary Dealers and Open-Market Operations -- Commercial Paper -- Letters of Credit and Bank Guarantees -- Yankee Paper -- Credit Rating -- Bills of Exchange -- Eurocurrency Deposits -- Money Market Futures -- Chapter 6: Forward and Futures Contracts -- Introduction -- Spot-Futures Equivalence -- Cash-and-Carry Arbitrage -- Synthetic Securities -- The Case of Assets Making Payouts -- Physical Assets -- The Case of Multiple Deliverable Grades -- Trading Volume and Open Interest -- Cash Settlement -- Hedging and Speculation -- Estimation of the Hedge Ratio and the Hedging Effectiveness -- Speculation -- Leverage -- Contract Value -- Forward versus Futures Prices -- Locking in Borrowing and Lending Rates -- Hedging the Rate of Return on a Stock Portfolio -- Changing the Beta -- Program Trading -- Stock Picking -- Portfolio Insurance -- The Importance of Futures -- Chapter 7: Options Contracts -- Moneyness -- Exchange-Traded Options -- Speculation with Options -- The Two-Period Model -- Valuation of European Put Options -- Valuing American Options -- Implementing the Binomial Model in Practice -- The Black-Scholes Model -- The Greeks -- Option Strategies -- Chapter 8: Foreign Exchange -- Introduction -- Currency Codes -- European Terms and American Terms -- Appreciating and Depreciating Currencies -- Converting Direct Quotes to Indirect Quotes -- The Impact of Spreads on Returns -- Arbitrage in Spot Markets -- Cross Rates -- Value Dates -- The Forward Market -- Outright Forward Rates -- Swap Points -- Broken-Dated Contracts -- A Perfect Market -- The Cost -- Interpretation of the Swap Points -- Short-Date Contracts -- Option Forwards -- Nondeliverable Forwards.

Futures Markets -- Hedging Using Currency Futures -- Exchange-Traded Foreign Currency Options -- The Garman-Kohlhagen Model -- Put-Call Parity -- The Binomial Model -- Chapter 9: Mortgages and Mortgage-Backed Securities -- Introduction -- Market Participants -- Government Insurance and Private Mortgage Insurance -- Risks in Mortgage Lending -- Other Mortgage Structures -- Negative Amortization -- Graduated-Payment Mortgage -- WAC and WAM -- Pass-Through Securities -- Extension Risk and Contraction Risk -- Accrual Bonds -- Floating-Rate Tranches -- Notional Interest Only Tranche -- Interest-Only and Principal-Only Strips -- PAC Bonds -- Agency Pass-Throughs -- Chapter 10: Swaps -- Introduction -- Contract Terms -- Market Terminology -- Inherent Risk -- The Swap Rate -- Illustrative Swap Rates -- Determining the Swap Rate -- The Market Method -- Valuation of a Swap During Its Life -- Terminating a Swap -- The Role of Banks in the Swap Market -- Comparative Advantage and Credit Arbitrage -- Swap Quotations -- Matched Payments -- Currency Swaps -- Cross-Currency Swaps -- Currency Risks -- Hedging with Currency Swaps -- Appendix 1 -- Appendix 2 -- Bibliography -- Web Sites -- Index.