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Contents
i. Preface 1
ii. Supplements 6
Introduction and Overview of Financial Markets 9
1. Introduction 11
2. Determinants of Interest Rates 46
3. Interest Rates and Security Valuation 82
4. Appendix 3A: Duration and Immunization 116
5. Appendix 3B: More on Convexity 120
6. The Federal Reserve System, Monetary Policy, and Interest Rates 126
Securities Markets 161
7. Money Markets 163
8. Appendix 5A: Single versus Discriminating Price Treasury Auctions 198
9. Appendix 5B: Creation of a Banker’s Acceptance 199
10. Bond Markets 202
11. Mortgage Markets 239
12. Appendix 7A: Amortization Schedules for No-Points versus Points Mortgages in Example 7–4 270
13. Stock Markets 286
14. Appendix 8A: The Capital Asset Pricing Model 327
15. Appendix 8B: Event Study Tests 329
16. Foreign Exchange Markets 331
17. Appendix 9A: Balance of Payment Accounts 356
18. Derivative Securities Markets 360
19. Appendix 10A: Black–Scholes Option Pricing Model 398
iii
Contents
Commercial Banks 403

20. Commercial Banks: Industry Overview 404
21. Commercial Banks’ Financial Statements and Analysis 430
22. Regulation of Commercial Banks 462
23. Appendix 13A: Calculating Deposit Insurance Premium Assessments 492
24. Appendix 13B: Calculating Risk-Based Capital Ratios 498
25. Appendix 13C: Primary Regulators of Depository Institutions 507
26. Appendix 13D: Deposit Insurance Coverage for Commercial Banks in Various Countries 508
27. Appendix 13E: Calculating Minimum Required Reserves at U.S. Depository Institutions 509
Other Financial Institutions 513
28. Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies 515
29. Insurance Companies 542
30. Securities Firms and Investment Banks 566
31. Mutual Funds and Hedge Funds 589
32. Pension Funds 620
33. Appendix 18A: Calculation of Growth in IRA Value during an Individual’s Working Years 641
Risk Management in Financial Institutions 643
34. Types of Risks Incurred by Financial Institutions 645
35. Managing Credit Risk on the Balance Sheet 665
36. Managing Liquidity Risk on the Balance Sheet 697
37. Appendix 21A: New Liquidity Risk Measures Implemented by the Bank for International Settlements 720
38. Appendix 21B: Sources and Uses of Funds Statement: Bank of America, June 2010 724
39. Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet 726
40. Managing Risk off the Balance Sheet with Derivative Securities 753
41. Appendix 23A: Hedging with Futures Contracts 783
42. Appendix 23B: Hedging with Options 790
43. Appendix 23C: Hedging with Caps, Floors, and Collars 795
44. Managing Risk off the Balance Sheet with Loan Sales and Securitization 799
A. References 825
B. Index 827
C. End Papers 853
iii
Financial Markets and Institutions, Fifth Edition 1
PREFACE
he last 20 years have been dramatic for the financial services industry. In the
T
1990s and 2000s, boundaries between the traditional industry sectors, such as
commercial banking and investment banking, broke down and competition
became increasingly global in nature. Many forces contributed to this break-
down in interindustry and intercountry barriers, including financial innovation,
technology, taxation, and regulation. Then in 2008–2009, the financial services
industry experienced the worst financial crisis since the Great Depression.
As the economic and competitive environments change, attention to profit and, more
than ever, risk become increasingly important. This book offers a unique analysis of the
risks faced by investors and savers interacting through both financial institutions and finan-
cial markets, as well as strategies that can be adopted for controlling and better managing
these risks. Special emphasis is also put on new areas of operations in financial markets
and institutions such as asset securitization, off-balance-sheet activities, and globalization
of financial services.
While maintaining a risk measurement and management framework, Financial Mar-
kets and Institutions provides a broad application of this important perspective. This book
recognizes that domestic and foreign financial markets are becoming increasingly inte-
grated and that financial intermediaries are evolving toward a single financial services
industry. The analytical rigor is mathematically accessible to all levels of students, under-
graduate and graduate, and is balanced by a comprehensive discussion of the unique envi-
ronment within which financial markets and institutions operate. Important practical tools
such as how to issue and trade financial securities and how to analyze financial statements
and loan applications will arm students with the skills necessary to understand and man-
age financial market and institution risks in this dynamic environment. While descriptive
concepts, so important to financial management (financial market securities, regulation,
industry trends, industry characteristics, etc.) are included in the book, ample analytical
techniques are also included as practical tools to help students understand the operation of
modern financial markets and institutions.
INTENDED AUDIENCE
Financial Markets and Institutions is aimed at the first course in financial markets and
institutions at both the undergraduate and M.B.A. levels. While topics covered in this book
are found in more advanced textbooks on financial markets and institutions, the explana-
tions and illustrations are aimed at those with little or no practical or academic experience
beyond the introductory level finance courses. In most chapters, the main relationships are
presented by figures, graphs, and simple examples. The more complicated details and tech-
nical problems related to in-chapter discussion are provided in appendixes to the chapters
located at the book’s Web site (www.mhhe.com/sc5e).
ORGANIZATION
Since our focus is on return and risk and the sources of that return and risk in domestic and
foreign financial markets and institutions, this book relates ways in which a modern finan-
cial manager, saver, and investor can expand return with a managed level of risk to achieve
the best, or most favorable, return–risk outcome.
Part 1 provides an introduction to the text and an overview of financial markets and
institutions. Chapter 1 defines and introduces the various domestic and foreign financial
markets and describes the special functions of FIs. This chapter also takes an analytical
look at how financial markets and institutions benefit today’s economy. In Chapter 2, we
provide an in-depth look at interest rates. We first look at factors that determine interest
rate levels, as well as their past, present, and expected future movements. We then review
vii
2 Fin Mkt & Inst - Vol. 1
viii Preface
the concept of time value of money. Chapter 3 then applies these interest rates to security
valuation. In Chapter 4, we describe the Federal Reserve System and how monetary pol-
icy implemented by the Federal Reserve affects interest rates and, ultimately, the overall
economy.
Part 2 of the text presents an overview of the various securities markets. We describe
each securities market, its participants, the securities traded in each, the trading process,
and how changes in interest rates, inflation, and foreign exchange rates impact a financial
manager’s decisions to hedge risk. These chapters cover the money markets (Chapter 5),
bond markets (Chapter 6), mortgage markets (Chapter 7), stock markets (Chapter 8),
foreign exchange markets (Chapter 9), and derivative securities markets (Chapter 10).
Part 3 of the text summarizes the operations of commercial banks. Chapter 11
describes the key characteristics and recent trends in the commercial banking sector.
Chapter 12 describes the financial statements of a typical commercial bank and the ratios
used to analyze those statements. This chapter also analyzes actual financial statements
for representative commercial banks. Chapter 13 provides a comprehensive look at the
regulations under which these financial institutions operate and, particularly, at the effect
of recent changes in regulation.
Part 4 of the text provides an overview describing the key characteristics and reg-
ulatory features of the other major sectors of the U.S. financial services industry. We
discuss other lending institutions (savings institutions, credit unions, and finance compa-
nies) in Chapter 14, insurance companies in Chapter 15, securities firms and investment
banks in Chapter 16, mutual funds and hedge funds in Chapter 17, and pension funds in
Chapter 18.
Part 5 concludes the text by examining the risks facing a modern FI and FI man-
agers and the various strategies for managing these risks. In Chapter 19, we preview
the risk measurement and management chapters in this section with an overview of the
risks facing a modern FI. We divide the chapters on risk measurement and management
along two lines: measuring and managing risks on the balance sheet, and managing risks
off the balance sheet. In Chapter 20, we begin the on-balance-sheet risk measurement
and management section by looking at credit risk on individual loans and bonds and
how these risks adversely impact an FI’s profits and value. The chapter also discusses
the lending process, including loans made to households and small, medium-size, and
large corporations. Chapter 21 covers liquidity risk in financial institutions. This chap-
ter includes a detailed analysis of the ways in which FIs can insulate themselves from
liquidity risk and the key role deposit insurance and other guarantee schemes play in
reducing liquidity risk.
In Chapter 22, we investigate the net interest margin as a source of profitability and
risk, with a focus on the effects of interest rate risk and the mismatching of asset and liabil-
ity maturities on FI risk exposure. At the core of FI risk insulation is the size and adequacy
of the owner’s capital stake, which is also a focus of this chapter.
The management of risk off the balance sheet is examined in Chapter 23. The chapter
highlights various new markets and instruments that have emerged to allow FIs to bet-
ter manage three important types of risk: interest rate risk, foreign exchange risk, and
credit risk. These markets and instruments and their strategic use by FIs include forwards,
futures, options, and swaps.
Finally, Chapter 24 explores ways of removing credit risk from the loan portfolio
through asset sales and securitization.
Preface ix
NEW FEATURES
Key changes to this edition include the following:
• Discussion of the 2008–2009 financial crisis has been added throughout the book.
Virtually every chapter includes new material detailing how the financial crisis affected
risk management in financial institutions.
• Appendix 1A describes events leading up to the financial crisis, events occurring at
the peak of the crisis, and events associated with the aftermath of the financial crisis, in-
cluding changes to financial institutions, the impact on U.S. and world economies, federal
financial and fiscal rescue efforts, and regulatory changes.
• Major changes proposed and implemented for the regulation of financial markets and
institutions are included where appropriate throughout the book.
• New boxes highlighting “Notable Events from the Financial Crisis” have been added
to chapters throughout the book.
• New end-of-chapter problems have been included in several chapters.
• Chapter 4 includes much discussion of the actions taken by the Federal Reserve and
other international central banks during and after the financial crisis.
• Chapters 5 through 10 highlight the effects of the financial crisis on various financial
markets and include discussions of the freezing of the commercial paper markets, the
municipal default crisis, the mortgage market meltdown, and the role of credit derivatives
in the financial crisis.
• Chapter 7 reviews the process that led to the conservatorship and proposed disman-
tling of Fannie Mae and Freddie Mac.
• Chapter 13 provides a synopsis of the Wall Street Reform and Consumer Protection
Act of 2010 and the new deposit insurance coverage and premium rules, as well as an
examination of the FDIC’s attempts to deal with the liquidity crisis, a discussion of the
TARP Capital Purchase Program and stress tests on the major commercial banks in 2009,
and a review of the new international capital standards being implemented for depository
institutions worldwide.
• Several chapters include discussions of major firms that have been lost or dramati-
cally altered as a result of the financial crisis (e.g., the failure of Bear Stearns, Lehman
Brothers, and AIG; conversions of Goldman Sachs, Morgan Stanley, GMAC, and CIT
Group to bank holding companies; the failure of Primary Reserve Money Market Funds;
and the failure of CIT Group).
• Chapters 22 through 24 discuss the role of derivative securities in the financial crisis,
including the roles of swaps (especially credit default swaps), collateralized mortgage,
and collateralized debt obligations (CMOs and CDOs).
• Tables and figures in all chapters have been revised to include the most recent data
available.
ACKNOWLEDGMENTS
We take this opportunity to thank all of those individuals who helped us prepare this and
previous editions. We want to express our appreciation to those instructors whose insight-
ful comments and suggestions were invaluable to us during this revision.
x Preface
Arabinda Basistha Adam Y. C. Lei

West Virginia University Midwestern State University
Deanne Butchey D. K. Malhotra
Florida International University Philadelphia University
Lucy Chernykh Khawaja Mamun
Bowling Green State University Sacred Heart University
Jon Chesbro Christine Mooney
Montana Tech Queensborough Community
Wan-Jiun Paul Chiou College
Shippensburg University Ohannes G. Paskelian
Lee M. Dunham University of Houston-Downtown
Creighton University Mitchell Ratner
Donald Flagg Rider University
University of Tampa Thomas W. Secrest
Victoria Geyfman Coastal Carolina University
Bloomsburg University of John Thornton
Pennsylvania Kent State University
Lin Guo Wenyuh Tsay
Suffolk University California State University
William W. Hall, Jr. San Marcos
The University of North Carolina Ying Wang
Wilmington University at Albany—SUNY
Wei He K. Matthew Wong
Mississippi State University St. John’s University
Taewon Kim Sehyun Yoo
California State University, Belmont University
Los Angeles
We would like to thank the staff at McGraw-Hill for their help and guidance, especially
Michele Janicek, executive editor; Kaylee Putbrese, editorial coordinator; Harvey Yep and
Jill Eccher, project managers; Melissa Caughlin, marketing manager; Jennifer Jelinski,
marketing specialist; Michael McCormick, senior buyer; Matthew Baldwin, lead designer;
and Rachel Townsend and Suresh Babu, media project managers. We are also grateful
to our secretaries and assistants, Alex Fayman, Jamie John McNutt, Sharon Moore, and
Brenda Webb.
Anthony Saunders
Marcia Millon Cornett

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xvi
9
Introduction and Overview

of Financial Markets
Introduction and Overview of Financial Markets part one
chapter
Introduction
1
Learning Goals O U T L I N E
Why Study Financial Markets

LG 1-1. Differentiate between primary and secondary markets. and Institutions? Chapter
Overview
LG 1-2. Differentiate between money and capital markets.
Overview of Financial
Markets
LG 1-3. Understand what foreign exchange markets are.
Primary Markets versus
Secondary Markets
LG 1-4. Understand what derivative security markets are.
Money Markets versus
LG 1-5. Distinguish between the different types of financial institutions. Capital Markets
Foreign Exchange
LG 1-6. Know the services financial institutions perform. Markets
Derivative Security
LG 1-7. Know the risks financial institutions face. Markets
Financial Market
LG 1-8. Appreciate why financial institutions are regulated. Regulation
Overview of Financial
LG 1-9. Recognize that financial markets are becoming increasingly global. Institutions
Unique Economic
Functions Performed by
Financial Institutions
WHY STUDY FINANCIAL MARKETS AND INSTITUTIONS? Additional Benefits FIs
CHAPTER OVERVIEW Provide to Suppliers of
Funds
In the 1990s, financial markets in the United States boomed. The Dow Jones Industrial Economic Functions FIs
Index—a widely quoted index of the values of 30 large corporations (see Chapter 8)—rose Provide to the Financial
from a level of 2,800 in January 1990 to more than 11,000 by the end of the decade; this System as a Whole
compares to a move from 100 at its inception in 1906 to 2,800 eighty-four years later.
Risks Incurred by
In the early 2000s, as a result of an economic downturn in the United States and else-
Financial Institutions
where, this index fell back below 10,000. The index rose to over 14,000 in July 2007,
Regulation of Financial
but (because of an increasing mortgage market credit crunch, particularly the subprime
Institutions
mortgage market) fell back to below 13,000 within a month of hitting the all-time high. By
2008, problems in the subprime mortgage market escalated to a full blown financial crisis Trends in the United
and the worst recession in the United States since the Great Depression. The Dow Jones States
Industrial Arerage (DJIA) fell to 6,547 in March 2009 before recovering, along with the Globalization of Financial
economy, to over 11,000 in April 2010. Markets and Institutions
While security values in U.S. financial markets rose dramatically in the 1990s, markets Appendix 1A: The Financial
in Southeast Asia, South America, and Russia were much more volatile. The Thai baht, for Crisis: The Failure of
example, fell nearly 50 percent in value relative to the U.S. dollar on July 2, 1997. More Financial Institutions’
recently, in 2002, as U.S. markets surged in value, Argentina’s economic and financial Specialness
1
2 Part 1 Introduction and Overview of Financial Markets
system collapsed and its currency fell more than 30 percent in value relative to the U.S.
dollar as the government relaxed the peso’s one-to-one parity peg to the dollar. During the
financial crisis of 2008–2009, however, market swings seen in the United States quickly
spread worldwide. Stock markets saw huge swings in value as investors tried to sort out
who might survive and who would not (and markets from Russia to Europe were forced to
suspend trading as stock prices plunged).
Meanwhile, the financial institutions (FIs) industry has gone through a full histori-
cal cycle. Originally the banking industry operated as a full-service industry, performing
directly or indirectly all financial services (commercial banking, investment banking, stock
investing, insurance provision, etc.). In the early 1930s, the economic and industrial col-
lapse resulted in the separation of some of these activities. In the 1970s and 1980s new,
relatively unregulated financial services industries sprang up (e.g., mutual funds, broker-
age funds) that separated the financial service functions even further.
The last 20 years have been particularly dramatic for the financial institutions indus-
try. In the 1990s and 2000s, regulatory barriers, technology, and financial innovation
changes were such that a full set of financial services could again be offered by a single
financial service firm under the umbrella of a financial services holding company. For
example, J. P. Morgan Chase operates a commercial bank (J. P. Morgan Chase Bank), an
investment bank (J. P. Morgan Securities, which also sells mutual funds), and an insur-
ance company (J. P. Morgan Insurance Agency). During the financial crisis, this finan-
cial services holding company purchased a savings institution, Washington Mutual, and
several investment banks, including Bear Stearns. Not only did the boundaries between
traditional industry sectors change, but competition became global in nature as well. For
example, J. P. Morgan Chase is the world’s ninth largest bank holding company, operating
in 60 countries.
Then came the late 2000s when the United States, and indeed the world, experienced
a collapse of financial markets second only to that experienced during the Great Depres-
sion. The financial crisis produced a major reshaping of all FI sectors and the end of many
major FIs (e.g., Bear Stearns and Lehman Brothers), with the two most prominent invest-
ment banks in the world, Goldman Sachs and Morgan Stanley, converting to bank holding
company status. Indeed, as of 2010, all the major U.S. investment banks have either failed,
been merged, or become bank holding companies.
As economic and competitive environments change, attention to profit and, more
than ever, risk becomes increasingly important. This book provides a detailed overview
and analysis of the financial system in which financial managers and individual investors
operate. Making investment and financing decisions requires managers and individuals to
understand the flow of funds throughout the economy as well as the operation and struc-
ture of domestic and international financial markets. In particular, this book offers a unique
analysis of the risks faced by investors and savers, as well as strategies that can be adopted
for controlling and managing these risks. Newer areas of operations such as asset securiti-
zation, derivative securities, and internationalization of financial services also receive spe-
cial emphasis. Further, as the United States and the world recover from the collapse of the
financial markets, this book highlights and discusses the impact of this crisis on the various
financial markets and the financial institutions that operate in them.
This introductory chapter provides an overview of the structure and operations of vari-
ous financial markets and financial institutions. Financial markets are differentiated by
the characteristics (such as maturity) of the financial instruments, or securities that are
exchanged. Moreover, each financial market, in turn, depends in part or in whole on finan-
cial institutions. Indeed, FIs play a special role in the functioning of financial markets. In
particular, FIs often provide the least costly and most efficient way to channel funds to and
from financial markets. As part of this discussion, we briefly examine how changes in the
way FIs deliver services played a major part in the events leading up to the severe financial
crisis of the late 2000s. A more detailed discussion of the causes of, the major events dur-
ing, and the regulatory and industry changes resulting from the financial crisis is provided
in Appendix 1A to the chapter.
Chapter 1 Introduction 3
OVERVIEW OF FINANCIAL MARKETS

financial markets Financial markets are structures through which funds flow. Table 1–1 summarizes the
The arenas through financial markets discussed in this section. Financial markets can be distinguished along
which funds flow. two major dimensions: (1) primary versus secondary markets and (2) money versus capital
markets. The next sections discuss each of these dimensions.
Primary Markets versus Secondary Markets

Primary Markets. Primary markets are markets in which users of funds (e.g., corpora-
tions) raise funds through new issues of financial instruments, such as stocks and bonds.
LG 1-1 Table 1–2 lists data on primary market sales of securities from 2000 through 2010. The
fund users have new projects or expanded production needs, but do not have sufficient
internally generated funds (such as retained earnings) to support these needs. Thus, the
fund users issue securities in the external primary markets to raise additional funds. New
issues of financial instruments are sold to the initial suppliers of funds (e.g., households) in
exchange for funds (money) that the issuer or user of funds needs.1 Most primary market
primary markets transactions in the United States are arranged through financial institutions called invest-
Markets in which cor- ment banks—for example, Morgan Stanley or Bank of America Merril Lynch—that serve
porations raise funds as intermediaries between the issuing corporations (fund users) and investors (fund sup-
through new issues of pliers). For these public offerings, the investment bank provides the securities issuer (the
securities.
funds user) with advice on the securities issue (such as the offer price and number of securi-
ties to issue) and attracts the initial public purchasers of the securities for the funds user. By
issuing primary market securities with the help of an investment bank, the funds user saves
the risk and cost of creating a market for its securities on its own (see discussion below).
Figure 1–1 illustrates a time line for the primary market exchange of funds for a new issue
of corporate bonds or equity. We discuss this process in detail in Chapters 6 and 8.
TABLE 1–1 Types of Financial Markets
Primary Markets—markets in which corporations raise funds through new issues of securities.
Secondary Markets—markets that trade financial instruments once they are issued.
Money Markets—markets that trade debt securities or instruments with maturities of less than
one year.
Capital Markets—markets that trade debt and equity instruments with maturities of more than
one year.
Foreign Exchange Markets—markets in which cash flows from the sale of products or assets
denominated in a foreign currency are transacted.
Derivative Markets—markets in which derivative securities trade.
TABLE 1–2 Primary Market Sales of Securities (in billions of dollars)
Security Type 2000 2005 2007 2008 2009 2010*
All issues $1,256.7 $2,439.0 $2,389.1 $1,068.0 $1,171.2 $259.8

Bonds 944.8 2,323.7 2,220.3 861.2 946.9 231.1
Stocks 311.9 115.3 1,168.8 206.8 224.3 28.7
Private placements 196.5 24.6 20.1 16.2 11.2 n.a.
IPOs 97.0 36.7 46.3 26.4 16.6 2.9
*Through first quarter.
1
We discuss the users and suppliers of funds in more detail in Chapter 2.
Figure 1–1 Primary and Secondary Market Transfer of Funds Time Line
Primary Markets
(Where new issues of financial instruments are offered for sale)
Users of Funds
Initial Suppliers
(Corporations Underwriting with
of Funds
issuing debt/equity Investment Bank
(Investors)
instruments)
Secondary Markets
(Where financial instruments, once issued, are traded)
Other
Financial
Securities Suppliers
Markets
Brokers of Funds
(Investors)
(Investors)
Financial instruments flow

Funds flow
Rather than a public offering (i.e., an offer of sale to the investing public at large), a
primary market sale can take the form of a private placement. With a private placement,
the securities issuer (user of funds) seeks to find an institutional buyer—such as a pension
fund—or group of buyers (suppliers of funds) to purchase the whole issue. Privately placed
securities have traditionally been among the most illiquid securities, with only the very
largest financial institutions or institutional investors being able or willing to buy and hold
them. We discuss the benefits and costs of privately placed primary market sales in detail
in Chapter 6.
Primary market financial instruments include issues of equity by firms initially going
public (e.g., allowing their equity—shares—to be publicly traded on stock markets for
initial public offerings the first time). These first-time issues are usually referred to as initial public offerings
(IPOs) (IPOs). For example, on May 28, 2010, Toys ‘R’ Us announced an $800 million IPO of
The first public issue of its common stock. The company’s stock was underwritten by several investment banks,
financial instruments by including Goldman Sachs.
a firm. Primary market securities also include the issue of additional equity or debt instru-
ments of an already publicly traded firm. For example, on March 18, 2010, Genpact Lim-
ited announced the sale of an additional 38,640,000 shares of common stock underwritten
by investment banks such as Morgan Stanley, Goldman Sachs, and Citigroup Global
Markets.
secondary market Secondary Markets. Once financial instruments such as stocks are issued in primary
A market that trades markets, they are then traded—that is, rebought and resold—in secondary markets. For
financial instruments example, on June 22, 2010, 23.7 million shares of ExxonMobil were traded in the second-
once they are issued. ary stock market. Buyers of secondary market securities are economic agents (consumers,
businesses, and governments) with excess funds. Sellers of secondary market financial
instruments are economic agents in need of funds. Secondary markets provide a central-
ized marketplace where economic agents know they can transact quickly and efficiently.
These markets therefore save economic agents the search and other costs of seeking buy-
ers or sellers on their own. Figure 1–1 illustrates a secondary market transfer of funds.
When an economic agent buys a financial instrument in a secondary market, funds are
exchanged, usually with the help of a securities broker such as Schwab acting as an inter-
mediary between the buyer and the seller of the instrument (see Chapter 8). The original
issuer of the instrument (user of funds) is not involved in this transfer. The New York Stock
Exchange (NYSE) and the National Association of Securities Dealers Automated Quota-
tion (NASDAQ)2 system are two well-known examples of secondary markets for trading
stocks.3 We discuss the details of each of these markets in Chapter 8.
In addition to stocks and bonds, secondary markets also exist for financial instruments
backed by mortgages and other assets (see Chapter 7), foreign exchange (see Chapter 9),
derivative security and futures and options (i.e., derivative securities—financial securities whose payoffs are
A financial security linked to other, previously issued [or underlying] primary securities) [see Chapter 10]. As
whose payoffs are linked we will see in Chapter 10, derivative securities have existed for centuries, but the growth
to other, previously in derivative securities markets occurred mainly in the 1980s through 2000s. As major
issued securities. markets, therefore, the derivative securities markets are among the newest of the financial
security markets. However, the financial crisis clearly illustrates the magnitude of the risk
that derivatives can impose on a FI and even the world’s financial system. Indeed, at the
very heart of the financial crisis were losses associated with off-balance-sheet derivative
securities created and held by FIs. Losses resulted in the failure, acquisition, or bailout of
some of the largest FIs (e.g., the investment banks Lehman Brothers, Bears Stearns, and
Merrill Lynch; the savings institution Washington Mutual; the insurance company AIG;
the commercial bank Citigroup; the finance company Countrywide Financial; and the gov-
ernment sponsored agencies Fannie Mae and Freddie Mac) and a near meltdown of the
world’s financial and economic systems.
Secondary markets offer benefits to both investors (suppliers of funds) and issuing
corporations (users of funds). For investors, secondary markets provide the opportunity to
trade securities at their market values quickly as well as to purchase securities with vary-
ing risk-return characteristics (see Chapter 2). Corporate security issuers are not directly
involved in the transfer of funds or instruments in the secondary market. However, the
issuer does obtain information about the current market value of its financial instruments,
and thus the value of the corporation as perceived by investors such as its stockholders,
through tracking the prices at which its financial instruments are being traded on second-
ary markets. This price information allows issuers to evaluate how well they are using
the funds generated from the financial instruments they have already issued and provides
information on how well any subsequent offerings of debt or equity might do in terms of
raising additional money (and at what cost).
Trading volume in secondary markets can be large. For example, on October 28, 1997,
NYSE trading volume exceeded 1 billion shares for the first time ever and trading of this
magnitude and higher has occurred several times since. Indeed, on October 10, 2008 (at
the height of the financial crisis), trading volume topped 7.3 billion shares, the highest
level to date. In contrast, during the mid-1980s, a NYSE trading day involving 250 million
shares was considered to be heavy.
Secondary markets offer buyers and sellers liquidity—the ability to turn an asset into
cash quickly—as well as information about the prices or the value of their investments.
Increased liquidity makes it more desirable and easier for the issuing firm to sell a security
2
In the fall of 2008, the NYSE, the world’s largest stock market and the American Stock Exchange (AMEX), at
the time the nation’s second largest floor-based exchange, merged.
3
Most bonds are not traded on floor-based exchanges. Rather, FIs trade them over the counter (OTC) using tele-
phone and computer networks (see Chapter 6). For example, less than 1 percent of corporate bonds outstanding are
traded on organized exchanges such as the NYSE.
Figure 1–2 Money versus Capital Market Maturities
Capital Market Securities

Money Market
Securities Notes and Bonds Stocks (Equities) Maturity
0 1 year to 30 years to No specified
maturity maturity maturity
initially in the primary market. Further, the existence of centralized markets for buying and
selling financial instruments allows investors to trade these instruments at low transaction
costs.
Money Markets versus Capital Markets

Money Markets. Money markets are markets that trade debt securities or instruments
with maturities of one year or less (see Figure 1–2). In the money markets, economic
LG 1-2 agents with short-term excess supplies of funds can lend funds (i.e., buy money market
instruments) to economic agents who have short-term needs or shortages of funds (i.e.,
they sell money market instruments). The short-term nature of these instruments means
that fluctuations in their prices in the secondary markets in which they trade are usually
quite small (see Chapters 3 and 19 on interest rate risk). In the United States, money mar-
kets do not operate in a specific location—rather, transactions occur via telephones, wire
money markets transfers, and computer trading. Thus, most U.S. money markets are said to be over-the-
Markets that trade debt counter (OTC) markets.
securities or instruments
with maturities of one Money Market Instruments. A variety of money market securities are issued by corpo-
year or less.
rations and government units to obtain short-term funds. These securities include Treasury
bills, federal funds, repurchase agreements, commercial paper, negotiable certificates of
over-the-counter (OTC) deposit, and banker’s acceptances. Table 1–3 lists and defines the major money market
markets securities. Figure 1–3 shows outstanding amounts of money market instruments in the
Markets that do not United States in 1990, 2000, and 2010. Notice that in 2010 negotiable CDs, followed by
operate in a specific fixed Treasury bills, federal funds and repurchase agreements, and commercial paper, had the
location—rather, trans- largest amounts outstanding. Money market instruments and the operation of the money
actions occur via tele- markets are described and discussed in detail in Chapter 5.
phones, wire transfers,
and computer trading.
Capital Markets. Capital markets are markets that trade equity (stocks) and debt
(bonds) instruments with maturities of more than one year (see Figure 1–2). The major
capital markets suppliers of capital market securities (or users of funds) are corporations and governments.
Markets that trade Households are the major suppliers of funds for these securities. Given their longer matu-
debt (bonds) and equity rity, these instruments experience wider price fluctuations in the secondary markets in
(stocks) instruments with which they trade than do money market instruments.4 For example, all else constant, long-
maturities of more than term maturity debt instruments experience wider price fluctuations for a given change in
one year. interest rates than short-term maturity debt instruments (see Chapter 3).
Capital Market Instruments. Table 1–3 lists and defines each capital market security.
Figure 1–4 shows their outstanding amounts by dollar market value. Notice that in both
2000 and 2010, corporate stocks or equities represent the largest capital market instrument,
followed by securitized mortgages and corporate bonds. Securitized mortgages are those
mortgages that FIs have packaged together and sold as bonds backed by mortgage cash
4
For example, their longer maturities subject these instruments to both higher credit (or bankruptcy) risk and
interest rate risk than money market instruments.
TABLE 1–3 Money and Capital Market Instruments
MONEY MARKET INSTRUMENTS
Treasury bills—short-term obligations issued by the U.S. government.

Federal funds—short-term funds transferred between financial institutions usually for no more
than one day.
Repurchase agreements—agreements involving the sale of securities by one party to another
with a promise by the seller to repurchase the same securities from the buyer at a specified date
and price.
Commercial paper—short-term unsecured promissory notes issued by a company to raise
short-term cash.
Negotiable certificate of deposit—bank-issued time deposit that specifies an interest rate and
maturity date and is negotiable, (i.e., can be sold by the holder to another party).
Banker’s acceptance—time draft payable to a seller of goods, with payment guaranteed by a
bank.
CAPITAL MARKET INSTRUMENTS
Corporate stock—the fundamental ownership claim in a public corporation.

Mortgages—loans to individuals or businesses to purchase a home, land, or other real property.
Corporate bonds—long-term bonds issued by corporations.
Treasury bonds—long-term bonds issued by the U.S. Treasury.
State and local government bonds—long-term bonds issued by state and local governments.
U.S. government agencies—long-term bonds collateralized by a pool of assets and issued by
agencies of the U.S. government.
Bank and consumer loans—loans to commercial banks and individuals.
Figure 1–3 Money Market Instruments Outstanding
1990 2000 2010*

$2,056 b. $4,510 b. $6,477.1 b.
outstanding outstanding outstanding
18.1% 25.6%
27.1% 26.5%
35.6%
16.7%
2.6%
25.7% 14.4% 0.0% 28.6%
26.6% 23.3% 29.1%
0.2%
Federal funds and repurchase agreements

Commercial paper
U.S. Treasury bills
Negotiable CDs
Banker’s acceptances
*As of the end of the first quarter.

Source: Federal Reserve Board, “Flow of Fund Accounts,” Statistical Releases, Washington, DC, various issues. www.v.gov
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six weeks ago—on the fifth of April to be exact. I should really say
the burglary, because there was also the theft of an important
document. The owners of that document would be glad of
information which would lead to the arrest of the thief.”
This astounding statement, made in the calm matter-of-fact way
in which the man was now speaking, took Cheyne completely aback.
For a moment he hesitated. His character was direct and
straightforward, but for the space of two seconds he was tempted to
prevaricate, to admit no knowledge of the incidents referred to. Then
his hot temper swept away all considerations of what might or might
not be prudent, and he burst out: “Well, Mr. Speedwell, what of it? If
you are so well informed as you pretend, you’ll be aware that the
parties lost no document on that night. I don’t know what you’re after,
but it looks uncommonly like an attempt at blackmail.”
Mr. Speedwell seemed pained at the suggestion. He assured
Cheyne that his remarks had been misinterpreted, and deprecated
the fact that such an unpleasant word had been brought into the
discussion. “All the same,” he concluded meaningly, “I am glad to
have your assurance that the document in question was not stolen
from the house.”
Cheyne was not only mystified, but a trifle uneasy. He saw now
that he had been maneuvered into a practical admission that he had
committed burglary, and there was something in the way the
detective had made his last remark that seemed vaguely sinister.
“Well, what business of yours is it?” he said brusquely. “What do
you hope to get out of it?”
Speedwell nodded as he looked at the other out of his close-set
furtive eyes.
“Now, sir,” he answered approvingly, “that’s what I like. That’s
coming to business, that is. I thought perhaps I could be of service to
you, that’s all. Here are these parties looking for you to make a
prosecution for burglary, and here you are looking for them for a
paper they have. And here am I,” his face was inexpressibly sly, “in a
position to help either party, as you might say. There’s an old saying,
sir, that knowledge is power, and many a time I’ve thought it’s a true
one.”
“And you want to sell your knowledge?”
“Isn’t it reasonable, and natural? It’s my business to get
knowledge, and I have to work hard to get it too. You wouldn’t have
me give away the fruits of my work? It’s all I have to live by.”
“Your knowledge belongs to your firm.”
“No, sir, not in this case it doesn’t. All this work was done in my
own time; it was my hobby, so to speak. Besides, my firm didn’t ask
for the information and doesn’t want it.”
“What do you want for it?”
A momentary gleam appeared in Mr. Speedwell’s eyes, but he
replied quietly and without emotion: “Two hundred pounds. Two
hundred pounds and you shall hear all I know, and have my best
help in whatever you want to do into the bargain. And in that case I
won’t be able to tell the other parties where you are to be found, so
being as their question was addressed to me and not to my firm.”
“Two hundred pounds!” Cheyne cried. “I’ll see you far enough
first. Confound your impertinence!” His anger rose and he almost
choked. “Don’t you imagine you are going to blackmail me! But I’ll tell
you what I am going to do. I’m going right in now to the head of your
firm to let him know the way you conduct his business. Two hundred
pounds. I don’t think!”
He flung himself out of the room and called the girl in the outer
office.
“I want to see the principal of the firm,” he shouted. “It’s
important. Either Mr. Horton or Mr. Lavender will do. As soon as
possible, please.”
The girl seemed half startled and half amused. “Who did you
want to see?” she asked.
“Mr. Horton or Mr. Lavender,” Cheyne repeated firmly, fixing her
with a wrathful stare.
“I—I’m afraid I don’t know where they are,” she stammered, the
corners of her mouth twitching. Yes, she was laughing at him.
Confound her impertinence also!
“You don’t know?” he shouted furiously. “When will they be in?”
The girl looked scared, then her amusement evidently overcame
her apprehension and she giggled.
“Not today, I’m afraid,” she answered. “You see Mr. Horton has
been dead over ten years and Mr. Lavender at least five.”
Cheyne glared at her as he asked thickly:
“Then who is the present principal?”
“Mr. Speedwell.”
“Damn,” said Cheyne: then as he looked at the smiling face of the
pretty clerk he suddenly felt ashamed of himself.
“I’m sure I beg your pardon,” he said, and as he saw how neatly
he had got his desserts he laughed ruefully himself. This confounded
temper of his, he thought, was always putting him into the wrong. He
was just determining for the thousandth time that he would be more
careful not to give way to it in future when Mr. Speedwell’s
melancholy voice fell on his ears.
“Ah, that is better, sir. Won’t you come back and let us resume
our discussion?”
Cheyne re-entered the private room.
“I’m sorry I lost my temper,” he said, “but really your proposition
was so very—I may say, amazing, that it upset me. Of course you
were not serious in what you said?”
Mr. Speedwell leaned forward and became the personification of
suave amiability.
“I sell my wares in the best market, Mr. Cheyne,” he declared.
“You couldn’t blame me for that; it’s only business. But I don’t want to
drive a hard bargain with you. I would rather have an amicable
settlement. I’m always one for peace and goodwill. An amicable
settlement, sir; that’s what I suggest.” He beamed on Cheyne and
rubbed his hands genially together.
“If you have information which would be useful to me I am
prepared to pay its full value. As a matter of fact I called for that
purpose. But you couldn’t have any worth two hundred pounds or
anything like it.”
“No? Well, just what do you want to know?”
“Dangle’s address.”
“I can give you that. Anything else?”
Cheyne hesitated. Should he ask for all the information he could
get about the sinister quartet and their mysterious activities? He had
practically admitted the burglary. Should he not make the most of his
opportunity? In for a penny, in for a pound.
“Did you ever hear of a man called Sime?” he asked.
“Of course, sir. Number Three of the quartet.”
“I should like his address also.”
“I can give it to you. And Blessington’s?”
“Yes, Blessington’s too.”
Cheyne was amazed by the knowledge of this Speedwell. He
would give a good deal to find out how he had obtained it.
“What are the businesses of these men?”
“That,” said Mr. Speedwell, “is three questions. First: What is
Dangle’s business? Second: What is Sime’s business? Third: What
is Blessington’s business? Yes, sir, I can answer these questions
also.”
“How did you find all that out?”
Mr. Speedwell smiled and shook his head.
“There, sir, you have me. I’m afraid I can’t tell you that. You see, if
we professional detectives were to give away our little methods to
you amateur gentlemen we should soon be out of business. You, sir,
will appreciate the position. It would be parting with our capital, and
no business man can afford to do that. Anything else, Mr. Cheyne?”
“You mentioned a paper?”
“Yes, sir?”
“Where is it?”
“That I can answer partially.”
“What is it about?”
“I do not know.”
“Ah, then there is something you do not know. What is the
enterprise these men are going into in connection with the paper?”
“That, Mr. Cheyne, I do not know either. You see I am perfectly
open with you. I have been conducting a sort of desultory inquiry into
these men’s affairs, partly because I was interested, partly because I
thought I could turn my information into money. I have reached the
point indicated in my answers. I can proceed with the investigation
and learn the rest of what you wish to know, assuming of course that
we come to suitable terms. You can have the information I have
already gained now, with of course the same proviso.”
“What are your terms?”
“Twenty pounds a question. You have asked six questions to
which I can give complete answers and one which I can answer
partially; say six twenties and one ten—total, one hundred and thirty
pounds.”
“But it’s iniquitous, scandalous, extortionate! I shouldn’t think of
paying such a sum.”
“No, sir? That’s a matter for yourself alone. It seems to me, then,
that our business is completed.” The man paused, then as Cheyne
made no move continued confidentially. “You see, sir, I needn’t tell a
gentleman like yourself that value is relative and not absolute. If I
hadn’t another party willing to pay for my information about you I
couldn’t perhaps afford to refuse what you might be pleased to offer.
But if I don’t get my hundred and thirty from you I’ll get it from the
other party. It’s a matter of £. s. d. for me.”
“But how do I know you won’t get my hundred and thirty and then
go to the other party for his?”
Mr. Speedwell smiled craftily.
“You don’t know, sir. In these matters one person has to take the
other’s word. You pay your money and you get the information you
ask for. You don’t pay and I keep it. It’s for you to say what you’ll do.”
Cheyne sat in thought. It was evident this man could give him
valuable information, and he was well aware that if he had employed
him to obtain it it might easily have cost him more than the sum
asked. He did not doubt, either, that the quartet had asked for
information about himself. When his dead body had not been found it
would have been a likely move. But he was surprised that they
should have asked under their own names. But then again, they
mightn’t have. Speedwell might have found these out. It was
certainly an extraordinary coincidence that himself and the gang
should have consulted the same private detective, though of course
there was nothing inherently impossible in it.
On the whole he felt disposed to pay the money. He was
comfortably enough off and he would scarcely feel it. The payment
would not commit him to anything or put him in any way in the power
of this detective. Moreover, the man was evidently skillful at his job
and it might be useful enough to have him on his side. And last, but
not least, after his failure of the day before it would be a pleasure to
go back to Miss Merrill and tell her how well he had succeeded on
this occasion.
“Look here,” he said. “I don’t think you can expect me to believe
that these people came and asked you to find the burglar who had
made off with their confidential paper, so that they might prosecute.
That’s rather tall, you know. Why didn’t they go direct to the police?”
“I’m only telling you what they said. I’m not saying I believed it
was really what they wanted.” Speedwell paused. “As a matter of
fact I don’t mind telling you what I think,” he went on presently. “I
believe they are scared about you, and they want to find you to finish
up the job they bungled. That’s what I think, but I may be wrong.”
“And if I pay you your hundred and thirty you’ll give me your
pledge not to give them the information?”
Mr. Speedwell looked pained.
“I don’t think I said that, sir. It was two hundred that was
mentioned. But see here. I don’t want to be grasping. If you make it
the even hundred and fifty I’ll answer your questions and not theirs.
Is it a bargain, sir?”
“Yes,” said Cheyne. “I have my check-book here and I’ll fill you in
a check for the money as soon as I get your replies.”
Mr. Speedwell beamed.
“Excellent, sir. An amicable settlement. That’s what I like. Well,
sir, I can trust you to keep your word. Here are the answers to your
questions.” He took a bulky notebook from his pocket and continued:
“First question, Dangle’s present address: Earlswood, Dalton
Avenue, Wembley.” He waited while Cheyne wrote the address, then
went on: “Second question, Sime’s present address: 12 Colton
Street, Putney.” Again a pause and then: “Third question,
Blessington’s present address: Earlswood, Dalton Av—”
“The same as Dangle’s?”
“The same as Dangle’s, or rather, to be strictly accurate, Dangle’s
is the same as Blessington’s. Blessington lives at this place and has
for several years; Dangle joined him about six weeks ago, to be
precise, on the day after the incident which I have just forgotten.”
Cheyne nodded with a rueful smile.
“Well, then, these men’s occupations?”
Mr. Speedwell was not to be hurried.
“Fourth question,” he proceeded methodically, “Dangle’s
occupation. Dangle, Mr. Cheyne, is just an ordinary town sharp. He
has a bit of money and adds to it in the usual ways. He’s in with a
cardsharping gang and helps them in their stunts—for a
consideration. He frequents a West End gaming room, and if there is
any fat pigeon around he’ll lend a hand in the plucking. The sister
helps as a decoy. They’re a warm pair and I should think are
watched by the police. They’ll not want their dealings with you to
come into the limelight anyway, so you’ve a pull over them there.”
“Has Dangle no ostensible profession?”
“Not that I know of, unless you call billiard playing a profession.”
“You might give me the address of the gaming rooms.”
“27 Greenway Lane, Knightsbridge.”
“What about Sime?”
“Sime is another of the same kidney. He does the night club end
and brings likely mugs on to the gaming rooms. A plausible ruffian,
Sime. A man without scruple and bad to be up against. He has no
ostensible business, either.”
“And Blessington?”
“Blessington is, in my opinion, the worst of the three. He has ten
times the brains of the other two put together and is an out and out
scoundrel. He’s well enough off in a small way and is supposed to
have made his money by systematic blackmail. He’s supplying the
cash for this little do of yours, whatever it may be. He is believed at
Wembley to be something in the city, but I don’t think he has any job.
Lives on the interest of his money, I should think.”
Cheyne noted the replies, marveling how the detective had come
to learn so much. Then he asked his seventh question.
“Where is the paper?”
“That, sir, I can only answer partially. It is, or was up till quite
lately, in Blessington’s possession. Whether he carries it about with
him or keeps it in his house or in his bank I don’t know. He may even
have lent it to one of the others, but he is the chief of the enterprise
and it appears to belong to him.”
“That’s all right,” Cheyne admitted. “Now what were you going to
tell me apart from these questions—the information you wrote
about?”
“Simply, sir, that the man who drugged you in the Edgecombe
Hotel in Plymouth was named Stewart Blessington, that he lived at
Wembley, and that he drugged you in order to ascertain if you
carried on your person a certain paper of which he was in search.”
“You can’t tell me how he did it?”
“No, sir. Some simple trick of course, but I had no chance to find
it out. I might perhaps suggest that he had two similar flasks, one
innocent and the other drugged, and that he changed them by
sleight of hand while attracting your attention elsewhere.”
Cheyne shook his head. He had thought of this explanation
before, but it was not satisfactory. He had been watching the man
and he was satisfied he had not played any such trick. Besides, this
would not explain why no trace of a drug was found in the food.
Speedwell, however, could make no further suggestion.
Cheyne put away his notebook.
“There’s another thing I should like to know,” he said, “and that is
how you have learned all this. I suppose you won’t tell me?”
Speedwell smiled as he shook his head.
“Some day, sir, when the case is over. You see, if I were to show
you my channels of information you would naturally use them
yourself, and then where should I come in? A man in my job soon
learns where to pick up a bit of knowledge. It’s partly practice and
partly knowing the ropes.”
“And there’s another thing I wish,” Cheyne went on as if he had
not heard the other, “and that is that you had gone a bit further in
your researches and learned what that paper was and what game
that gang is up to.”
The detective’s manner became more eager.
“That’s what I was coming to myself, Mr. Cheyne. If you want that
information I can get it for you. But it may cost you a bit of money. It
would depend on the time I should have to spend on it and the risks I
should have to run. If you would like me to take it on for you I could
do so. But of course it’s a matter for yourself altogether.”
Cheyne reflected. This Speedwell had certainly done an amazing
amount of work already on the case, and his success so far showed
that he was a shrewd and capable man. To engage him to complete
the work would probably be the quickest way of bringing the matter
to a head, and the easiest, so far as he himself was concerned. But
then he would lose all the excitement and the fun. He had pitted his
wits against these men, and to hand the affair over to Speedwell
would be to confess himself beaten. Moreover, he would have to
admit his failure to Miss Merrill and to forego any more alarms and
excursions in her company. No, he would keep the thing in his own
hands for the present at all events.
He therefore said that he was obliged for the other’s offer, which
later on he might be glad to accept, but that for the moment he would
not make any further move.
“Right, sir. Whatever you say,” Speedwell agreed amicably. “I
might add what indeed you’ll be able to guess for yourself from what
I’ve told you, that this crowd is a pretty shrewd crowd, and they’ll not,
so to speak, be beating the air in this job of yours. They’re going for
something, and you may take it from me that something will be worth
their going for. At least, if not, I’ll eat my hat.”
“I quite agree with you,” Cheyne returned, fumbling in his pocket.
“It now remains for me to write my check and then we shall be
square.”
Cheyne counted the hours until four o’clock, and as soon as he
dared he set off for No. 17 Horne Terrace. Indeed, he timed his visit
so well that as he reached the top of the tenth flight of steps, the
door of room No. 12 opened and the model emerged. She held the
door open for him, and ten minutes later he was seated in the big
armchair drinking the usual cup of fragrant China tea.
Miss Merrill listened with close attention to his story, but she was
not so enthusiastic at his success as he could have wished. She
made no comment until he had finished and then her remark was, if
anything, disparaging.
“I don’t quite like it, you know,” she said slowly. “From your
description of him it certainly looks as if that detective was playing a
game of his own. It doesn’t sound straight. Do you think you can
trust him?”
“Not as far as I can see him, but how can I help myself? I expect
the addresses he gave are all correct, but I’m not at all satisfied that
he won’t go straight to the gang and tell them he has found me and
get their money for that.”
“And you think you wouldn’t be wiser to back out yourself and
instruct him to carry on for you?”
Cheyne sat up and took his pipe out of his mouth.
“I’m damned if I will,” he declared hotly. “It might be a lot wiser
and all that, but I’m just not going to.”
“You’re quite sure? I couldn’t persuade you?” she went on
demurely, without looking at him.
“I can’t imagine you trying, Miss Merrill. But in any case I’m going
on.”
“Good!” she cried, and her eyes lit up as she smiled at him.
“You’re quite mad, but I sometimes like mad people. Then if, in spite
of all I can say, you’re going on, what about a visit to Wembley
tonight?”
“The very ticket!” Cheyne was swept by a wave of delight and
enthusiasm. “It is jolly of you to suggest it. And you will come out to
dinner and I may pay my bet!”
“As it’s a bet—all right. But you must go away now. I have some
things to attend to. I’ll meet you when and where you say.”
“What about the Trocadero at seven? A leisurely dinner and then
we for Wembley?”
“Right-o,” she laughed and vanished into the other room, while
Cheyne, full of an eager excitement, went off to telephone orders to
the restaurant as to the reservation of places.
Chapter X.
The New Firm Gets Busy
Cheyne and Joan Merrill took a Wembley Park train from Baker
Street shortly before nine that evening, and a few minutes later
alighted at the station whose name was afterwards to become a
household word throughout the length and breadth of the British
Empire. But at that time the Exhibition was not yet thought of, and
the ground, which was later to hum with scores of thousands of
visitors from all parts of the world, was now a dark and deserted
plain.
When the young people left the station and began to look around
them, they found that they had reached the actual fringe of the
metropolis. Towards London were the last outlying rows of detached
and semidetached houses of the standard suburban type. In the
opposite direction, towards Harrow, was the darkness of open
country. Judging by the number of lights that were visible, this
country was extraordinarily sparsely inhabited.
Guarded inquiries from the railway officials had evoked the
information that Dalton Road lay some ten minutes’ walk from the
station in a northeasterly direction, and thither the two set off. They
passed along with circumspection, keeping as far as possible from
the street lamps and with their coat collars turned up and the brims
of their hats pulled down over their eyes. But the place was
deserted. During the whole of their walk they met only one person—
a man going evidently to the station, and he strode past with barely a
glance.
Dalton Road proved, save for its street lamps and footpath, to be
little more than a lane. It led somewhat windingly in an easterly
direction off the main road. The country at this point was more thickly
populated and there was quite a number of houses in view. All were
built in the style of forty years ago, and were nearly all detached,
standing in small grounds or lots. Here and there were fine old trees
which looked as if they must have been in existence long before the
houses, and most of the lots were well supplied with shrubs and with
high and thick partition hedges.
Nearly all the gates bore names, and as the two young people
walked along, they had no difficulty in identifying Earlswood. There
was a lamp at the other side of the road which enabled them to read
the white letters on their green ground. Without pausing they glanced
around, noting what they could of their surroundings.
A narrow lane running north and south intersected Dalton Road
at this point, and in each of the four angles were houses. That in the
southwest corner was undergoing extension, the side next the lane
showing scaffolding and half-built brick walls. The two adjoining
corners were occupied by houses which presented no interesting
features, and in the fourth corner, diagonally opposite that of the
building operations, stood Earlswood. All four houses were
surrounded by unusually large lots containing plenty of trees.
Earlswood was particularly secluded, the hall door being almost
hidden from both road and lane by hedges and shrubs.
“Lucky it’s got all those trees about it,” Cheyne whispered as they
passed on down Dalton Road. “If we have to burgle it we can do it
without being overlooked by the neighbors.”
They continued on their way until they found that Dalton Road
debouched on a wide thoroughfare which inquiries showed was
Watling Street, the main road between London and St. Albans. Then
retracing their steps to Earlswood, they followed the cross lane, first
south, which brought them back to Wembley, and north, which after
about a mile brought them out on the Harrow Road. Having thus
learned the lie of the land so as to know where to head in case a
sudden flight became necessary, they returned once more to
Earlswood to attempt a closer examination of the house.
They had noticed when passing along the cross lane beside the
house to which the extension was being made that a gap had been
broken in the hedge for the purpose of getting in the building
materials. This was closed only by a wooden slat. With one consent
they made for the gap, slipped through, and crouching in the shadow
of the shrubs within, set themselves to watch Earlswood.
No light showed in any of the front windows, and as soon as Miss
Merrill was seated on a bundle of brushwood sheltered from the light
but rather chilly wind, Cheyne crept out to reconnoiter more closely.
Making sure that no one was approaching, he slipped through the
hedge, and then crossing both road and lane diagonally, passed
down the lane at the side of Earlswood.
There was no gap in the Earlswood hedge, but just as in the case
of that other similarly situated house which he had investigated, a
narrow lane ran along at the bottom of the tiny garden behind.
Cheyne turned into this and stood looking at the back of the house.
The whole proceeding seemed familiar, a repetition of his actions on
the night he traced the gang to Hopefield Avenue.
But the back of this house was in darkness, and pushing open a
gate, he passed from the lane to the garden and silently approached
the building. A path led straight from gate to door, a side door
evidently, as the walled-in yard was on his left hand. Another path to
the right led round the house to the hall door in the front.
Cheyne walked slowly round, examining doors and windows. All
of these were fastened and he did not see how without breaking the
glass he could force an entrance. But he found a window at the
back, the sash of which was loose and easy fitting, and decided that
in case of need he would operate on this.
Having learned everything he could, he retraced his steps to his
companion and they held a whispered consultation. Cheyne was for
taking the opportunity of the house being empty to make an attempt
then and there to get in. But Miss Merrill would not hear of it. Such a
venture, she said, would require very careful thought as well as
apparatus which they had not got. “Besides,” she added, “you’ve
done enough for one night. Remember you’re not completely well
yet.”
“Oh, blow my health; I’m perfectly all right,” he whispered back,
but he had to admit her other arguments were sound and the two,
cautiously emerging from their hiding-place, walked back to
Wembley and took the next train to town.
She was silent during the journey, but as they reached Baker
Street she turned to him and said: “Look here, I believe I’ve got an
idea. Bring a long-burning electric torch with you tomorrow afternoon
and whatever tools you want to open the window, and perhaps we’ll
try our luck.” She would not explain her plan nor would she allow him
to accompany her to the studio, so with rather a bad grace he said
good night and returned to his hotel.
The next day he spent in making an assortment of purchases.
These were in all a powerful electric torch, guaranteed to burn
brightly for a couple of hours, a short, slightly bent lever of steel with
a chisel point at one end, a cap, a pair of thin gloves, a glazier’s
diamond, some twenty feet of thin rope and a five-inch piece of
bright steel tubing with a tiny handle at one side. These, when four
o’clock came, he took with him to Horne Terrace and spread in
triumph on Miss Merrill’s table.
“Good gracious!” cried the young lady as she stared wonderingly
at the collection. “Whatever are these? Another expedition to Mount
Everest?”
“Torch: takes the place of the old dark lantern,” Cheyne answered
proudly, pointing to the article in question. “Jemmy for persuading
intractable doors, boxes and drawers; cap that will not drop or blow
off; gloves to keep one’s fingerprints off the furniture; diamond for
making holes in panes of glass; penknife for shooting back snibs of
windows; rope for escaping from upstairs windows, and this”—he
picked up the bit of tube and levelled it at her—“what price this for
bluffing out of a tight place? If the light’s not too good it’s a pretty fair
imitation. Also”—he pointed to his feet—“rubber-soled shoes for
silence.”
She gave a delightful little ripple of laughter, then became
serious.
“Have you no anklets?” she asked anxiously. “Don’t say you have
forgotten your anklets!”
“Anklets?” he repeated. “What d’you mean? I don’t follow.”
“To guard against the bites of sharks, of course,” she declared.
“Don’t you remember the White Knight had them for his horse?”
Cheyne was so serious and eager that he felt somewhat dashed,
but he joined in the laugh, and when they had had tea they settled
down to talk over their arrangements. Then it seemed that she really
had a plan, and when Cheyne heard it he became immediately
enthusiastic. Like all good plans it was simple, and soon they had
the details cut and dry.
“Let’s try tonight,” Cheyne cried in excitement.
“Yes, I think we should. If these people have some scheme on
hand every day’s delay is in their favor and against you.”
“Against us, Joan, not against me,” he cried, then realizing what
he had said, he looked at her anxiously. “I may call you Joan, mayn’t
I?” he pleaded. “You see, we’re partners now.”
She didn’t mind, it appeared, what he called her. Any old name
would do. And she didn’t mind calling him Maxwell either. She hadn’t
noticed that Maxwell was so frightfully long and clumsy, but she
supposed Max was shorter. So that was that. They returned to the
Plan. Though they continued discussing it for nearly an hour neither
was able to improve on it, except that they decided that the first thing
to be done if they got hold of the tracing was to copy their
adversaries and photograph it.
“Drat this daylight saving,” Cheyne grumbled. “If it wasn’t for that
we could start a whole hour earlier. As it is there is no use going out
there before nine.” He paused and then went on: “Queer thing that
these two houses should be so much alike—this Earlswood and the
one in Hopefield Avenue. Both at cross roads, both with lanes
behind them, and both surrounded by gardens and hedges and
shrubs.”
“Very queer,” Joan admitted, “especially as there probably aren’t
more than a hundred thousand houses of that type in London. But
it’s all to the good. You’ll feel at home when you get in.”
They sparred pleasantly for some time, then after a leisurely
dinner they tubed to Baker Street and took the train to Wembley
Park. It was darker than on the previous evening, for the sky was
thickly overcast. There had been some rain during the day, but this
had now ceased, though the wind had turned east and it had
become cold and raw.
Turning into Dalton Road, they reached the cross-lane at
Earlswood, passed through the gap in the hedge and took up their
old position among the shrubs. They had seen no one and they
believed they were unobserved. From where they crouched they
could see that Earlswood was again in darkness, and presently
Cheyne slipped away to explore.
He was soon back again with the welcome news that the rear of
the house was also unlighted and that the Plan might be put into
operation forthwith. In spite of Joan’s ridicule he had insisted on
bringing his complete outfit, and he now stood up and patted himself
over to make sure that everything was in place. The cap, the gloves,
and the shoes he was wearing, the rope was coiled round his waist
beneath his coat, and the other articles were stowed in his various
pockets. He turned and signified that he was ready.
Joan opened the proceedings by passing out through the gap in
the hedge, walking openly across to the Earlswood hall door, and
ringing. This was to make sure that the house really was untenanted.
If any one came she would simply ask if Mrs. Bryce-Harris was at
home and then apologize for having mistaken the address.
But no one answered, and the demonstration of this was
Cheyne’s cue. When he had waited for five minutes after Joan’s
departure and no sound came from across the road, he in his turn
slipped out through the gap in the hedge, and after a glance round,
crossed Dalton Road, and passing down by the side of Earlswood,
turned into the lane at the back. On this occasion he could dimly see
the gate into the garden, which was painted white, and he passed
through, leaving it open behind him, and reached the house.
The point upon which Joan’s plan hinged was that, owing to the
shrubs in front of the building, it was possible to remain concealed in
the shadows beside the porch, invisible from the road. She
proposed, therefore, to stay at the door while Cheyne was carrying
on operations within, and to ring if any one approached the house,
adding a double knock if there was urgent danger. She would hold
the newcomer with inquiries as to the whereabouts of the mythical
Mrs. Bryce-Harris, thus insuring time for her companion to beat a
retreat. She herself also would have time in which to vanish before
her victims realized what had happened.
Feeling, therefore, that he would have a margin in which to
withdraw if flight became necessary, Cheyne set to work to force an
entrance. He rapidly examined the doors and windows, but all were
fastened as before. Choosing the window with the loose sash upon
which he had already decided, he took his knife and tried to open the
catch. The two sashes were “rabbitted” where they met, but he was
able to push the blade up right through the overhanging wood of the
upper sash and lever the catch round until it snapped clear. Then
withdrawing the knife, he raised the bottom sash. A moment later he
was standing on the scullery floor.
His first care was to unlock and throw open the back door, so as
to provide an emergency exit in case of need. Then he closed and
refastened the scullery window, darkening with a pencil the wood
where the knife had broken a splinter. As he said to himself, there
was no kind of sense in calling attention to his visit.
He crossed the hall and silently opened the front door to see that
all was right with Joan. Then closing it again, he began a search of
the house.
The building was of old-fashioned design, a narrow hall running
through its center from back to front. Five doors opened off this hall,
leading to the dining room and the kitchen at one side, a sitting room
and a kind of library or study at the other, and the garden at the
back. Upstairs were four bedrooms—one unoccupied—and a
servant’s room.
Cheyne rapidly passed through the house searching for likely
hiding places for the tracing. Soon he came to the conclusion that
unless some freak place had been chosen, it would be in one of two
places: either a big roll-top desk in the library or an old-fashioned
escritoire in one of the bedrooms. Both of these were locked.
Fortunately there was no safe.
He decided to try the desk first. A gentle application of the jemmy
burst its lock and he threw up the cover and sat down to go through
the contents.
Evidently it belonged to Blessington, and evidently also
Blessington was a man of tidy and businesslike habits. There were
but few papers on the desk and these from their date were clearly
current and waiting to be dealt with. In the drawers were bundles of
letters, accounts, receipts, and miscellaneous papers, all neatly tied
together with tape and docketed. In one of the side drawers was a
card index and in another a vertical numeralpha letter file. Through
all of these Cheyne hurriedly looked, but nowhere was there any
sign of the tracing.
A few measurements with a pocket rule showed that there were
no spaces in the desk unaccounted for, and closing the top, Cheyne
hurried upstairs to the escritoire. It was a fine old piece and it went to
his heart to damage it with the jemmy. But he remembered his
treatment aboard the Enid, and such a paroxysm of anger swept
over him that he plunged in the point of his tool and ruthlessly
splintered open the lid.
The drawers were fastened by separate locks, and each one
Cheyne smashed with a savage satisfaction. Then he began to
examine their contents.
This was principally bundles of old letters, tied up in the same
methodical way as those downstairs. Cheyne did not read anything,
but from the fragments of sentences which he could not help seeing
there seemed ample corroboration of Speedwell’s statements that
Blessington lived by professional blackmail. He felt a wave of disgust
sweep over him as he went through drawer after drawer of the
obscene collection.
But here also no luck met his efforts, and with a sinking heart he
took out his rule to measure the escritoire. And then he became
suddenly excited as he found that the thickness of the wood at the
back of the drawers, which normally should have been about half an
inch, measured no less than four inches. Here, surely, there must be
a secret drawer.
He examined the woodwork, but nowhere could he see the
slightest trace of an opening. He pressed and pulled and pushed, but
still without result: no knob would slide, no panel depress. But of the
existence of the space there was no doubt. There was room for a
receptacle six inches by twelve by three, and, moreover, all six sides
of it sounded hollow when tapped.
There was nothing for it but force. With a sharp stroke he
rammed the point of the jemmy into the side. It penetrated, he
levered it down, and with a grinding, cracking sound the wood split
and part of it was prised off. Eagerly Cheyne put the torch to the
opening, and he chuckled with satisfaction as he saw within the
familiar lilac gray of the tracing.
Once again he inserted the point of the jemmy to prise off the
remainder of the side, but the heavy wood at the top of the piece
prevented his getting a leverage. He withdrew the tool to find a fresh
purchase, but as he did so, the front door bell rang—several sharp,
jerky peals. Frantically he jammed in the jemmy, intending by sheer
force to smash out the wood, but his position was hampered, and it
cracked, but did not give. As he tried desperately for a fresh hold an
urgent double knock sounded from below. Sweating and tugging with
the jemmy he heard voices outside the window. And then with a
resounding crack the panel gave, he plunged in his hand, seized the
tracing, thrust it and the jemmy into his pocket and rushed out of the
room.
But as he did so he heard the front door open and Dangle’s voice
from below: “It sounded in the house. Didn’t you think so?” and
Susan’s: “Yes, upstairs, I thought.”
Cheyne looked desperately round for a weapon. Near the head of
the stairs stood a light cane chair, and this he seized as he dashed
down. As he turned the angle of the stairs Dangle switched on the
light in the hall, and with a startled oath ran forward to intercept him.
With all his might Cheyne hurled the chair at the other’s head.
Dangle threw up his arms to protect his face, and by the time he
recovered himself Cheyne was in the hall, doubling round the newel
post. Both Dangle and Susan clutched at the flying figure. But
Cheyne, twisting like an eel, tore himself free and made at top speed
for the back door. This he slammed after him, rushing as fast as he
could down the garden. He slackened only to pull the gate to as he
passed through it, then sped along the lane, and turning at its end
away from Dalton Road, tore off into the night.
These proceedings were not in accordance with the Plan. The
intention had been that on either recovering the tracing or satisfying
himself that it was not in the house, Cheyne would close the back
door, and letting himself out by the front, would meet Joan, pull the
door to after them, walk round the house and quietly disappear via
the garden and lane. But the possibility of an unexpected flight had
been recognized. It had been decided that in such a case the first
thing would be to get rid of the tracing, so that in the event of
capture, the fruits of the raid would at least be safe. Therefore, on all
the routes away from Earlswood hiding places had been fixed on,
from which Joan would afterwards recover it. Along the lane the
hiding place was the back of a wall approaching a culvert, and over
this wall Cheyne duly threw the booty as he rushed along.
By this time Dangle was out on the road and running for all he
was worth. But Cheyne had the advantage of him. He was lighter
and an experienced athlete, and, except for his illness, was in better
training. Moreover, he was more lightly clad and wore rubber shoes.
Dangle, though Cheyne did not know it, was hampered by an
overcoat and patent leather boots. He could not gain on the fugitive,
and Cheyne heard his footsteps dropping farther and farther behind,
until at last they ceased altogether.
Cheyne slacked to a walk as he wiped the perspiration from his
forehead. So far as he was concerned he had now only to make his
way back to town and meet Joan at her studio. He considered his
position and concluded his best and safest plan would be to go on to
Harrow and take an express for Marylebone—if he could get one.
He duly reached Harrow, but he found there that he would have
nearly an hour to wait for a non-stop train for London. He decided,
however, that this would be better than risking a halt at Wembley
Park, and he hung about at the end of the platform until the train
came along. On reaching town he took a taxi to Horne Terrace and
hurried up to No. 12. Joan had not returned!
He waited outside her room for a considerable time, then coming
down, began to pace the street in front of the house. Every moment
he became more and more anxious. It was now half past twelve
o’clock and she should have been back over an hour ago. What
could be keeping her? Merciful Heavens! If anything could have
happened to her.
He wrote a note on a leaf of his pocketbook saying he would
return in the morning, and going once more up to her flat, pushed it
under the door. Then hailing a belated taxi, he offered the man a
fancy price to drive him to Wembley Park.
Some half-hour later he climbed over the wall across which he
had thrown the tracing. A careful search showed that it was no
longer there; moreover it revealed the print of a dainty shoe with a
rather high heel, such as he had noticed Joan wearing earlier in the

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(Original PDF) Capital Markets: Institutions,

Sustainable Finance in Europe: Corporate Governance,

Commercial Banks 403

Arabinda Basistha Adam Y. C. Lei

Marcia Millon Cornett

FOR THE INSTRUCTOR FOR THE STUDENT

Student progress tracking

Introduction and Overview

Introduction and Overview of Financial Markets part one

Why Study Financial Markets

2 Part 1 Introduction and Overview of Financial Markets

OVERVIEW OF FINANCIAL MARKETS

Primary Markets versus Secondary Markets

TABLE 1–1 Types of Financial Markets

TABLE 1–2 Primary Market Sales of Securities (in billions of dollars)

Security Type 2000 2005 2007 2008 2009 2010*

All issues $1,256.7 $2,439.0 $2,389.1 $1,068.0 $1,171.2 $259.8

*Through first quarter.

4 Part 1 Introduction and Overview of Financial Markets

Financial instruments ﬂow

6 Part 1 Introduction and Overview of Financial Markets

Figure 1–2 Money versus Capital Market Maturities

Capital Market Securities

Money Markets versus Capital Markets

TABLE 1–3 Money and Capital Market Instruments

MONEY MARKET INSTRUMENTS

Treasury bills—short-term obligations issued by the U.S. government.

CAPITAL MARKET INSTRUMENTS

Corporate stock—the fundamental ownership claim in a public corporation.

Figure 1–3 Money Market Instruments Outstanding

1990 2000 2010*

Federal funds and repurchase agreements

*As of the end of the first quarter.

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