Capital Markets
Institutions, Instruments, and Risk Management
by Fabozzi
| ISBN: 9780262049672 | Copyright 2025
Instructor Requests
The comprehensively updated sixth edition of a leading textbook that examines the wide range of instruments available in financial markets, with new material on central banks, capital market technology, and financing markets for small businesses.
Capital markets are an integral part of the financial system, and their evolution reflects a larger story of global financial change characterized by shifts in regulations, investor behavior, and technological advancements. Now in a comprehensively updated new edition, this widely used textbook examines the wide range of instruments for financing, investing, and controlling risk in today's financial markets. The book begins with an introduction to financial markets, followed by a detailed examination of risk, including financial risk identification, quantification, and management. It then covers market participants, including a new chapter on central banks; fundraising markets, with a new chapter on financing markets for small businesses; risk and return theories; equity, debt, and derivatives markets; and capital market technologies, in a dedicated new section.
Sixth edition highlights:
•Includes new chapters on central banks, capital market technologies, and financing markets for small businesses
•Incorporates analysis of the role of technological innovation throughout
•Offers broad coverage of all types of financial instruments, including cash and derivative instruments, as well as the risk management dilemmas confronted by major institutional investors
•Features rich pedagogy and resources, including end-of-chapter discussion questions and integrated online appendices
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| Cover (pg. Cover) | |
| Contents (pg. vii) | |
| Preface (pg. ix) | |
| Acknowledgments (pg. xvii) | |
| About the Author (pg. xix) | |
| I: Introduction (pg. 1) | |
| 1. Financial Assets and Financial Markets (pg. 3) | |
| Learning Objectives (pg. 3) | |
| Financial Assets (pg. 4) | |
| Financial Markets (pg. 13) | |
| Derivative Markets (pg. 17) | |
| Financial Markets and the Real Economy (pg. 18) | |
| The Financial Sector and Economic Development (pg. 18) | |
| Asset Classes (pg. 20) | |
| Capital Market Technologies (pg. 22) | |
| Key Points (pg. 23) | |
| Questions (pg. 25) | |
| Internet Research Questions (pg. 26) | |
| 2. Overview of Risks and Risk Management (pg. 27) | |
| Learning Objectives (pg. 27) | |
| Defining Risk (pg. 28) | |
| Financial Risk Management (pg. 31) | |
| Investment Risk (pg. 35) | |
| Funding Risk (pg. 44) | |
| Systemic Financial Risk (pg. 48) | |
| Financial Innovation (pg. 49) | |
| Key Points (pg. 50) | |
| Questions (pg. 53) | |
| Internet Research Questions (pg. 56) | |
| II: The Players (pg. 57) | |
| 3. Overview of Market Participants (pg. 59) | |
| Learning Objectives (pg. 59) | |
| Investors and Issuers (pg. 60) | |
| Financial Institutions (pg. 68) | |
| Role of Governments in Financial Markets (pg. 71) | |
| Credit Reporting Companies (pg. 79) | |
| Other International Participants (pg. 85) | |
| Key Points (pg. 87) | |
| Questions (pg. 90) | |
| Internet Research Questions (pg. 92) | |
| 4. Depository Institutions (pg. 95) | |
| Learning Objectives (pg. 95) | |
| The Asset/Liability Problem of Depository Institutions (pg. 96) | |
| Regulators of Banks (pg. 98) | |
| Bank Regulation (pg. 103) | |
| Bank Activities (pg. 109) | |
| Bank Funding (pg. 110) | |
| Nonbank Depository Institutions: Thrifts (pg. 112) | |
| Shadow Banking (pg. 115) | |
| Challenges of Capital Market Technology to Banks (pg. 117) | |
| Key Points (pg. 118) | |
| Questions (pg. 121) | |
| Internet Research Questions (pg. 123) | |
| 5. Central Banks (pg. 125) | |
| Learning Objectives (pg. 125) | |
| Objectives of Central Banks (pg. 126) | |
| Financial Stability and Monetary Policy (pg. 127) | |
| The Federal Reserve (pg. 128) | |
| Debate on Central Bank Independence (pg. 140) | |
| Central Banks and Climate Policy (pg. 141) | |
| Criticisms of Central Banks (pg. 141) | |
| Key Points (pg. 143) | |
| Questions (pg. 144) | |
| Internet Research Questions (pg. 145) | |
| 6. Insurance Companies and Defined Benefit Pension Plans (pg. 147) | |
| Learning Objectives (pg. 147) | |
| Insurance Companies (pg. 148) | |
| Defined Benefit Pension Funds (pg. 164) | |
| Key Points (pg. 172) | |
| Questions (pg. 174) | |
| Internet Research Questions (pg. 175) | |
| 7. Managers of Collective Investment Vehicles (pg. 177) | |
| Learning Objectives (pg. 177) | |
| Investment Company Shares (pg. 178) | |
| Exchange-Traded Funds (pg. 186) | |
| Hedge Funds (pg. 189) | |
| Real Estate Investment Trusts (pg. 193) | |
| Key Points (pg. 195) | |
| Questions (pg. 197) | |
| Internet Research Questions (pg. 198) | |
| 8.Investment Banking Firms (pg. 199) | |
| Learning Objectives (pg. 199) | |
| Public Offering (Underwriting) of Securities (pg. 201) | |
| Trading of Securities (pg. 203) | |
| Private Placement of Securities (pg. 210) | |
| Securitization Of Assets (pg. 211) | |
| Mergers and Acquisitions (pg. 211) | |
| Merchant Banking (pg. 212) | |
| Financial Restructuring Advising (pg. 212) | |
| Securities Finance (pg. 213) | |
| Prime Brokerage (pg. 213) | |
| Trading and Creation of Derivative Instruments (pg. 213) | |
| Asset Management (pg. 214) | |
| Fintech Firm Challenges to Investment Banking Firms (pg. 214) | |
| Key Points (pg. 215) | |
| Questions (pg. 217) | |
| Internet Research Questions (pg. 218) | |
| III: Fund Raising Markets (pg. 221) | |
| 9. Primary and Secondary Markets (pg. 223) | |
| Learning Objectives (pg. 223) | |
| Primary Market (pg. 224) | |
| Secondary Markets (pg. 237) | |
| The Role of Fintech Firms on Primary and Secondary Markets (pg. 253) | |
| Key Points (pg. 254) | |
| Questions (pg. 257) | |
| Internet Research Questions (pg. 259) | |
| 10. Securitization and Its Role in Primary Markets (pg. 261) | |
| Learning Objectives (pg. 261) | |
| Securitization and the Creation of a Securitized Product (pg. 262) | |
| Benefits of Securitization to Financial Markets (pg. 267) | |
| Concerns with Securitization (pg. 269) | |
| Need for the Development of an Accommodating Legal Structure (pg. 272) | |
| Securitization as a Corporate Risk Management Tool (pg. 275) | |
| The Subprime Mortgage Crisis and Securitization (pg. 276) | |
| The Dodd–Frank Act and Securitization (pg. 279) | |
| Key Points (pg. 280) | |
| Questions (pg. 282) | |
| Internet Research Questions (pg. 284) | |
| 11. Financing Markets for Small Businesses (pg. 285) | |
| Learning Objectives (pg. 285) | |
| Definition of a Small Business (pg. 286) | |
| Government Programs and Initiatives (pg. 287) | |
| Stages of Development and Financing for a Business Venture (pg. 288) | |
| Sources for Seed-Stage Financing (pg. 291) | |
| Expansion Financing (pg. 296) | |
| Equity Dilutive Securities Used for New Ventures (pg. 301) | |
| Key Points (pg. 307) | |
| Questions (pg. 310) | |
| Internet Research Questions (pg. 311) | |
| IV: Basics of Derivatives Markets (pg. 313) | |
| 12. Introduction to Risk-Sharing Derivatives: Futures, Forwards, and Swaps (pg. 315) | |
| Learning Objectives (pg. 315) | |
| Classification of Derivatives (pg. 316) | |
| Types of Risk-Sharing Derivative Contracts (pg. 318) | |
| Pricing of Futures and Forward Contracts (pg. 328) | |
| General Principles of Hedging with Futures (pg. 337) | |
| The Role of Risk-Sharing Derivatives in Financial Markets (pg. 338) | |
| Effect of Futures and Swaps on the Volatility of the Underlying Asset (pg. 339) | |
| Key Points (pg. 340) | |
| Questions (pg. 342) | |
| Internet Research Questions (pg. 346) | |
| 13. Introduction to Insurance-Type Derivatives: Options, Credit Default Swaps, Caps, and Floors (pg. 347) | |
| Learning Objectives (pg. 347) | |
| Types of Insurance-Type Derivatives (pg. 348) | |
| Pricing of Options (pg. 363) | |
| Economic Role of Insurance-Type Derivatives (pg. 375) | |
| Key Points (pg. 377) | |
| Questions (pg. 379) | |
| Internet Research Questions (pg. 383) | |
| V: Risk and Return Theories (pg. 385) | |
| 14. Return Distributions and Risk Measures (pg. 387) | |
| Learning Objectives (pg. 387) | |
| Measuring the Rate of Return (pg. 388) | |
| Return Distributions (pg. 389) | |
| Joint Probability Distributions (pg. 397) | |
| Portfolio Risk Measures (pg. 400) | |
| Reward-Risk Ratios (pg. 404) | |
| Key Points (pg. 407) | |
| Questions (pg. 411) | |
| Internet Research Questions (pg. 414) | |
| 15. Portfolio Selection Theory (pg. 417) | |
| Learning Objectives (pg. 417) | |
| The Concept of Portfolio Diversification (pg. 418) | |
| Markowitz Portfolio Theory (pg. 420) | |
| Criticisms of Portfolio Theory (pg. 429) | |
| Markowitz Portfolio Theory in Practice (pg. 433) | |
| Key Points (pg. 436) | |
| Questions (pg. 437) | |
| Internet Research Questions (pg. 440) | |
| 16. Asset Pricing Theories (pg. 441) | |
| Learning Objectives (pg. 441) | |
| Economic Assumptions (pg. 442) | |
| Capital Market Theory (pg. 443) | |
| The Capital Asset Pricing Model (pg. 448) | |
| The Multifactor CAPM (pg. 459) | |
| The Arbitrage Pricing Theory Model (pg. 461) | |
| Empirical Asset Pricing Models (pg. 464) | |
| Some Principles to Take Away (pg. 467) | |
| Key Points (pg. 468) | |
| Questions (pg. 470) | |
| Internet Research Questions (pg. 471) | |
| VI: Interest Rate Determination and Debt Pricing (pg. 473) | |
| 17. The Theory and Structure of Interest Rates (pg. 475) | |
| Learning Objectives (pg. 475) | |
| Interest Rate Theories (pg. 476) | |
| Real and Nominal Interest Rates: Fisher’s Law (pg. 479) | |
| The Natural Rate of Interest (pg. 479) | |
| Risk-Free Interest Rate and the Existence of a Safe Asset (pg. 480) | |
| Negative Interest Rates (pg. 481) | |
| Structure of Interest Rates (pg. 482) | |
| The Libor Transition (pg. 486) | |
| Historical Interest Rates in the United States (pg. 488) | |
| Key Points (pg. 491) | |
| Questions (pg. 492) | |
| Internet Research Questions (pg. 494) | |
| 18. Valuation of Debt Contracts and Their Price Volatility Properties (pg. 495) | |
| Learning Objectives (pg. 495) | |
| Features of Debt Contracts (pg. 496) | |
| Features of Debt Contracts (pg. 496) | |
| Return From a Bond: Yield to Maturity Measure (pg. 498) | |
| Price of an Option-Free Bond (pg. 499) | |
| Reasons for Changes in Bond Price (pg. 500) | |
| What Determines the Premium-Par Yield (pg. 501) | |
| Reinvestment of Cash Flow and Yield (pg. 501) | |
| Bond Price Volatility (pg. 503) | |
| Key Points (pg. 516) | |
| Questions (pg. 517) | |
| Internet Research Questions (pg. 521) | |
| 19. The Term Structure of Interest Rates (pg. 523) | |
| Learning Objectives (pg. 523) | |
| The Yield Curve and the Term Structure (pg. 524) | |
| Forward Rates (pg. 530) | |
| Historical Shapes Observed for the Treasury Yield Curve (pg. 536) | |
| Determinants of the Shape of the Term Structure (pg. 537) | |
| Key Points (pg. 544) | |
| Questions (pg. 546) | |
| Internet Research Questions (pg. 549) | |
| VII: Equity Markets (pg. 551) | |
| 20. The Structure of the Common Stock Market (pg. 553) | |
| Learning Objectives (pg. 553) | |
| Regulators of Equities Markets (pg. 554) | |
| Equity Trading Venues (pg. 556) | |
| Execution of an Order (pg. 562) | |
| Market Trading Regulation (pg. 563) | |
| Other Types of Common Stock Trading (pg. 570) | |
| Trading of Stocks Outside the Country Where they are Domiciled (pg. 571) | |
| Key Points (pg. 573) | |
| Questions (pg. 577) | |
| Internet Research Questions (pg. 579) | |
| 21. Common Stock Strategies and Trading Arrangements (pg. 581) | |
| Learning Objectives (pg. 581) | |
| Stock Market Indexes (pg. 581) | |
| Pricing Efficiency of the Stock Market (pg. 584) | |
| Trading Mechanics (pg. 590) | |
| Trading (Transaction) Costs (pg. 594) | |
| Trading Arrangements for Institutional Investors (pg. 598) | |
| High-Frequency Trading (pg. 602) | |
| Key Points (pg. 606) | |
| Questions (pg. 610) | |
| Internet Research Questions (pg. 613) | |
| VIII: Debt Markets (pg. 615) | |
| 22. The Money Market for Private Debt Instruments (pg. 617) | |
| Learning Objectives (pg. 617) | |
| Interbank Funding Market (pg. 618) | |
| Repo Market (pg. 619) | |
| Commercial Paper Market (pg. 624) | |
| Large-Denomination Negotiable Certificates of Deposit (pg. 628) | |
| Banker’s Acceptances (pg. 630) | |
| Funding Agreements (pg. 633) | |
| Money Market Funds (pg. 633) | |
| Key Points (pg. 635) | |
| Questions (pg. 637) | |
| Internet Research Questions (pg. 638) | |
| 23. Treasury and Agency Securities Markets (pg. 639) | |
| Learning Objectives (pg. 639) | |
| U.S. Department of the Treasury and Debt Management (pg. 640) | |
| The Market for U.S. Treasury Securities (pg. 642) | |
| The Market for Federal Agency Securities (pg. 653) | |
| Key Points (pg. 656) | |
| Questions (pg. 658) | |
| Internet Research Questions (pg. 661) | |
| 24. Municipal Securities Markets (pg. 663) | |
| Learning Objectives (pg. 663) | |
| Tax-Exempt Versus Taxable Municipal Securities Market (pg. 664) | |
| Tax Treatment of Tax-Exempt Municipal Bonds (pg. 665) | |
| Yields on Tax-Exempt Municipal Bonds (pg. 667) | |
| Types and Features of Municipal Securities (pg. 669) | |
| Tax Risks Associated with Investing in Municipal Securities (pg. 677) | |
| Regulation of the Municipal Securities Market (pg. 677) | |
| Primary Market for Municipal Securities (pg. 679) | |
| Secondary Market for Municipal Securities (pg. 681) | |
| Key Points (pg. 681) | |
| Questions (pg. 684) | |
| Internet Research Questions (pg. 685) | |
| 25. Corporate Senior Instruments Markets (pg. 687) | |
| Learning Objectives (pg. 687) | |
| Credit Risk and the Rating of Corporate Debt (pg. 688) | |
| Bankruptcy and Creditor Rights (pg. 691) | |
| Bank Loans (pg. 693) | |
| Lease Financing (pg. 696) | |
| Corporate Bonds (pg. 697) | |
| Medium-Term Notes (pg. 709) | |
| Preferred Stock (pg. 711) | |
| Key Points (pg. 712) | |
| Questions (pg. 714) | |
| Internet Research Questions (pg. 716) | |
| 26. International Bond Markets (pg. 717) | |
| Learning Objectives (pg. 717) | |
| Classification of Global Bond Markets (pg. 717) | |
| Eurobond Market (pg. 719) | |
| The Non-U.S. Government Bond Market (pg. 722) | |
| Emerging Market Bonds (pg. 724) | |
| Some Special Structures and Bond Types (pg. 725) | |
| European Union Regulation of Bond Market (pg. 728) | |
| Key Points (pg. 729) | |
| Questions (pg. 731) | |
| Internet Research Questions (pg. 732) | |
| 27. The Residential Mortgage Market (pg. 733) | |
| Learning Objectives (pg. 733) | |
| Origination of Residential Mortgage Loans (pg. 734) | |
| Types of Residential Mortgage Loans (pg. 737) | |
| Investment Risks (pg. 746) | |
| Development of the Secondary Mortgage Market (pg. 747) | |
| Key Points (pg. 749) | |
| Questions (pg. 752) | |
| Internet Research Questions (pg. 753) | |
| 28. The Market for U.S. Agency Residential Mortgage–Backed Securities (pg. 755) | |
| Learning Objectives (pg. 755) | |
| U.S. Agency Pass-Through Securities (pg. 756) | |
| U.S. Agency CMOs (pg. 767) | |
| U.S. Agency Stripped Mortgage-Backed Securities (pg. 779) | |
| Key Points (pg. 781) | |
| Questions (pg. 782) | |
| Internet Research Questions (pg. 783) | |
| 29. The Market for Credit-Sensitive Securitized Products (pg. 785) | |
| Learning Objectives (pg. 785) | |
| Collateral Type (pg. 786) | |
| Credit Risks Associated with Investing in ABS (pg. 788) | |
| Credit Enhancement (pg. 791) | |
| Forms of Credit Enhancement (pg. 791) | |
| Private-Label Residential Mortgage–Backed Securities (pg. 794) | |
| Commercial Mortgage–Backed Securities (pg. 797) | |
| Review of Major Non-Mortgage-Related Types of ABS (pg. 801) | |
| Key Points (pg. 804) | |
| Questions (pg. 808) | |
| Internet Research Questions (pg. 809) | |
| IX: Derivatives Markets (pg. 811) | |
| 30. The Market for Equity Derivatives (pg. 813) | |
| Learning Objectives (pg. 813) | |
| Exchange-Traded Stock Options (pg. 814) | |
| Warrants (pg. 827) | |
| Stock Index Options (pg. 827) | |
| The Stock Index Futures Market (pg. 830) | |
| Equity Swaps (pg. 837) | |
| Equity Market Volatility Indexes (pg. 838) | |
| Issues Associated with Equity Derivatives (pg. 839) | |
| Key Points (pg. 843) | |
| Questions (pg. 845) | |
| Internet Research Questions (pg. 848) | |
| 31. The Market for Interest Rate Risk Transfer Vehicles: Exchange-Traded Products (pg. 849) | |
| Learning Objectives (pg. 849) | |
| Interest Rate Futures Contracts (pg. 850) | |
| Exchange-Traded Futures Options (pg. 859) | |
| Key Points (pg. 863) | |
| Questions (pg. 864) | |
| Internet Research Questions (pg. 866) | |
| 32. The Market for Interest Rate Risk Transfer Vehicles: OTC Instruments (pg. 867) | |
| Learning Objectives (pg. 867) | |
| Over-The-Counter Interest Rate Options (pg. 868) | |
| Forward Rate Agreements (pg. 869) | |
| Interest Rate Swaps (pg. 870) | |
| Interest Rate Agreements (pg. 882) | |
| Key Points (pg. 884) | |
| Questions (pg. 885) | |
| Internet Research Questions (pg. 887) | |
| 33. The Market for Credit Risk Transfer Vehicles (pg. 889) | |
| Learning Objectives (pg. 889) | |
| Credit Derivatives (pg. 890) | |
| Credit Default Swaps (pg. 892) | |
| Collateralized Debt Obligations (pg. 897) | |
| Credit-Linked Notes (pg. 899) | |
| Key Points (pg. 900) | |
| Questions (pg. 901) | |
| Internet Research Questions (pg. 902) | |
| 34. The Market for Foreign Exchange and Risk Control Instruments (pg. 903) | |
| Learning Objectives (pg. 903) | |
| Foreign Exchange Rates (pg. 904) | |
| Spot Market (pg. 907) | |
| Instruments for Hedging Foreign Exchange Rate Risk (pg. 909) | |
| Key Points (pg. 920) | |
| Questions (pg. 921) | |
| Internet Research Questions (pg. 923) | |
| X: Technology and Capital Markets (pg. 925) | |
| 35. Capital Market Technologies (pg. 927) | |
| Learning Objectives (pg. 927) | |
| How Technology Impacts Capital Markets (pg. 928) | |
| Capital Market Technology Applications (pg. 936) | |
| Digital Assets (pg. 945) | |
| Concerns with Capital Market Technologies (pg. 947) | |
| Decentralized Finance (pg. 949) | |
| Key Points (pg. 954) | |
| Questions (pg. 956) | |
| Internet Research Questions (pg. 957) | |
| Index (pg. 959) | |
Frank J. Fabozzi
Frank J. Fabozzi is Professor of Practice at Johns Hopkins Carey Business School. He has held positions at EDHEC Business School, Yale, Princeton, MIT, NYU, and Carnegie Mellon. He is the author of Entrepreneurial Finance and Accounting for High-Tech Companies and Introduction to Fixed-Income Analysis and Portfolio Management, and coauthor of Bond Markets, Analysis, and Strategies, Tenth Edition and Foundations of Global Financial Markets and Institutions, all published by the MIT Press. His forthcoming coauthored books to be published by MIT Press are The Economics of FinTech and Simulation, Optimization, and Machine Learning for Finance.|
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