Includes bibliographical references and indexes.

Part 1 Principles: lending, payments and risk-taking; the financial system and its technology; efficiency, stability and government intervention. Part 2 Interest rates and exchange rates: interest rates, exchange rates and security prices; the level of interest rates and exchange rates; money, prices, interest rates and exchange rates; the structure of interest rates and exchange rates. Part 3 Intermediaries: understanding financial intermediaries; commercial banks; the banking industry - part 1; the banking industry - part 2; near banks - thrifts, finance companies and others; payments and foreign exchanges; insurance; pension funds and mutual funds. Part 4 Markets: understanding security markets; the market for government securities; the money market; the capital market; the mortgage market and securitization; the derivatives market - futures, options and swaps. Part 5 Stability and the central bank: managing liquidity and risk; the stability of the financial system; deposit insurance; controlling the quantity of money; monetary policy.

This text is designed to provide students with an understanding of why institutions and markets take the form they do and why this form is constantly changing. It considers each institution and market from three angles: economic function, historical context and international comparison.