Interest rates (I%)

Periods
420
	..	..

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Appendix II • Present and future value tables

Table 2 Future value of a £1 lump sum in n-years’ time, compounded at i. FV= £1(1i) n


Interest rates (I%)

		Periods
			421
..	..

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Appendix II • Present and future value tables

L

(1 i) n J

1

£1G 1 

i I

Table 3 Present value of a £1 annuity, paid for n-years, discounted at i. PV 

Interest rates (I%)

Periods
422
	..	..

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Appendix II • Present and future value tables

£1 [(1 i) n 1]



i

Table 4 Future value of a £1 annuity, accumulated for n-years, compounded at i. FV

Interest rates (I%)

		Periods
			423
..	..

FINM_Z02.qxd	1/18/07	11:05 AM	Page 424
				..

FINM_Z03.qxd 1/18/07 11:05 AM Page 425

Index

adverse selection 95	and monetary policy 52–5, 141–5, 185
agency capture 365	as monopoly supplier of liquidity 77–8
aggregate demand	national debt, managing 59–60
composition of 41–3	and parallel markets 136–7
level of 37–41	Banking Act (1987) 58, 367, 375
liquid assets and spending 37	Banking Act (1998) 59
money and spending 37–8	banking book model of capital adequacy 387
Alesina, A 54	banks 61–7
Alternative Investment Market (AIM) 161	assets and liabilities 62, 67
annuity 98, 407	branches 64
annuity insurance policy 98	ows affecting liquidity of 128
arbitrageurs 118	and foreign exchange 238
of foreign exchange 238	government sale of bonds to 323
Asian options 278	lending, constraints on
assets	demand for lending 73–4
of banks 62	demand for money 74–5
creation of 7–9	monetary base 75–80
of investment trusts 112–14	and money creation 67–73
liquid 9, 39–40	process of 69–73
public sector 311	reasons for 67–9
liquidity of 19	off-balance-sheet activities 375–6
in long-term insurance and general insurance	retail 62–5
96	regulation of 384–5
asymmetric information 4, 94	supervision of 372–6
authorised unit trusts 110	wholesale 65–6
automated teller machines (ATMs) 63–5	Barings Bank 283–4
	barrier options 278
Bade, R 54	Basel Accord (Basel I) 392–7
Bank for International Settlements 368,	capital adequacy requirements 282, 391–2
389–90	Basel Concordat 390–93
Bank Holding Act (USA, 1956) 373	Basel II (New Basel Accord) 395–8
bank multiplier approach to ination 297	basis points 119
Bank of Credit and Commerce International	basis rate swap 301
(BCCI) 354, 393–4	Bernanke, B 239–40
Bank of England	beta coefcient 180–1, 408–9, 416
balance sheet 56	bid-ask spread 237
banking supervisor 57–9	bid rate 237
and commercial banking system 55–6	Big Bang reforms 162–3, 367
currency, issuer of 60	bills in discount market
foreign exchange, managing 60	and bank liquidity 121, 126–8
and government 53–4, 57	demand for 125–6
as lender of last resort 56, 77–8, 141–5	short-term 123
market-based interventions by 142	supply of 123–5

425

..

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Index

bonds	commodity swap 304
characteristics of 151–5	competitive laxity 370, 372
coupons 151–2, 168–72, 175	compounding 406
demand for 167	condor 281
government sale of to banks 323	consumer protection in nancial markets 363–4,
and interest rate futures 271–3	373
and interest rates 152	contagion 362, 373
overseas sale of 154, 324	contracts for difference (CFDs) 279
prices, behaviour of 170–6, 184–7	contractual nancial saving 18
residual maturity of 151	contractual insurance policies 98
supply of 164–8	conversion factor on bonds 272–3
trading of 157–8	convertible bonds 153
borrowing 25–6	convertible currency 292
in national income 31–3, 35, 37	convertibles 300
and wealth 26	core capital 391
Bretton Woods system 135	corporate banking 62, 64–5
brokers 158–9, 163	corporate bonds 150–3, 185
broking 6	country risk 207
Brown, G 258, 315–6	covered call (on options) 276
bubbles 191, 193, 249, 348	covered interest parity 244
Budd, A 140	credit ratings 185
building societies 82–5	credit risk options 278
incorporated as banks 84–5	currency, issuer of 60
Building Societies Act (1986) 83–4	currency swap 304
Building Societies Association 82
buttery spreads 281	Dale, R 399
	DCE 90
call options 273–4	Debt Management Ofce (DMO) 157–8, 318
callable bonds 153	debt:equity ratio 155–6
capital account, household sector 32–3	default risk 9
capital adequacy 374	dened benet pension scheme 101–2
Capital Adequacy Directive (EU) 282, 387–8, 397	dened contribution pension scheme 102–3
capital asset pricing model 180, 416–18	deposit insurance (UK, 2005) 58
capital ows 289	deposit products 67–9
capital markets 18–19	deposit takers 5–6, 49–50
importance of 150–1	deposit-taking institutions 49–85
international, effects of 356–8	derivatives 261
world-wide 289–90	derivatives markets
capital risk 9, 171–2	comparing differing types 279–80
cash markets 265	complexity of and regulation 389–98
central banks and foreign exchange 238	nancial futures 266–73
certicates of deposit	options 273–9
market for 130–2	use and abuses of 281–6
pricing 131–2	diff swap 304–5
clean price of bonds 170	direct lending 2, 13
clearing house 268	direct quotation in foreign exchange markets 235–7
closed-ended fund 107, 111	dirty price of bonds 170
closing out of contracts 265	discount rate
commercial banks and Bank of England 55–6	on bills 121
commercial hot money 289	on equities 179, 181
commercial paper market 132–3	discounted present value 168–71, 179

426

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Index

discounting 121, 123, 168–71, 179, 405	European Union: regulation of nancial markets
discretionary nancial saving 18	381–9
diversication	banking industry 384–5
gains from 12–13, 412–16	insurance services 388–9
dividend irrelevance theorem 178, 336	securities market 385–8
dividend yield 156, 177	exchange, equation of 37–8
dividends per share 156	Exchange Rate Agreement (ERA) 305
and equity prices 177–9, 181, 187–8	exchange rate futures 267
domestic currency and foreign exchange markets	exchange rate overshooting 249
236–8	exchange rate risk
Dornbusch, R 249	exposure to 262–4
double no touch options 278	management techniques 264
dual currency bonds 300	exchange rates
Duisenberg, W 256	expression of 237
duration 172	futures 267
	exchange-traded derivatives 265, 279–80
earnings 156	exercise price 273
earnings per share 156	exotic options 278
earnings yield 156, 157	extrapolative expectations 320
economic exposure in derivatives 262–3
efcient markets hypothesis 190–3, 336	Fazio, A 356
end-users of foreign exchange 238	nancial activity, measuring 93
endowment mortgages 343–4	nancial decit 23, 30, 34
mis-selling of 377–80	nancial instability 347–51
endowment policy 98	nancial institutions
Enron 353–4	assets and liabilities, creation of 7–8
Equitable Life 378–9	as rms 4
equities	as intermediaries 6
characteristics of 155–6	portfolio equilibrium 15–16
demand for 177–81, 183	nancial instruments
prices, behaviour of 187–90	demand for 20–1
supply of 162–77	supply of 20
trading of 157–8	Financial Intermediaries, Managers and
equity protected notes 305	Brokers Regulatory Association (FIMBRA)
equity swap 304	370
EURIBOR 301	nancial intermediary 6–7
euro and UK 257–8	nancial markets 17–22
euro bonds 154, 160	demand for nancial instruments 20–1
eurobond market 160	efciency of 45–6
eurobonds 154, 160	exclusion from 338–9
eurocurrencies	products, classifying 19
growth of markets 135, 292–4	products, types 17–18
and ination 297	regulation of seeregulation of nancial markets
issues 296–9	stocks and ows in 22–30
multiplier 297	supply of nancial instruments 20
nature of market 294–5	nancial net worth 36
eurocurrency 135	nancial ombudsman service 377
eurodollars, creation of 291–2	nancial press, reading 193–8
euronote markets 299–305	nancial regulation in UK 367–81
European Central Bank (ECB) 55, 252	banking supervision 372–6
interest rate policy 256–7	reforms, 1998 376–7

427

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Index

nancial repression 46	Frey, E 325
Financial Services Act (1986) 367, 369, 376	Froot, K A 249, 349
Financial Services and Markets Act (FSMA, 2000)	fundamental value 45, 183, 238
50, 61, 99, 110, 376–7	funded pension schemes 100–3
Financial Services Authority (FSA) 58, 59, 82,	funk money 289
99–100, 110–12, 343–4, 377–81	futures contracts 266
nancial surplus 23, 30, 33–4	and options 280
nancial system
efciency 44–6	gearing 155–6
functions 2–3	of options 275
and household debt 345–7	general insurance 95–7
and resource allocation 43–5	asset holdings 96
nancial wealth 36, 41	Germany 55
First Banking Directive 397	Gilt Edge Market Makers (GEMMs) 157–9
scal balances, UK 315	gilt-edged securities
scal policy, UK 315–6	in nancial press 193–5
Fisher effect 245–6	market innovations 157–60
xed foreign exchange rates 251–2	globalisation and regulation of nancial markets
xed-interest securities 122, 151	Goodhart, C.A.E. 79
ex options 278	government
ight capital 289	Bank of England as banker to 57
ip-op options 300	bonds, taxation of 160, 175
oating foreign exchange rates 251–2	debt, sale of 325–6
oating rate eurobonds 300	scal policy of 315–6
oating rate notes 154	gross debt of 311
ows	sale of bonds to banks 323
affecting liquidity of banks 72–3, 128, 140–5	Grilli, V. 54
in nancial markets 21–2	Gross Domestic Product 32, 39
of funds in non-deposit-taking institutions
114	harmonisation of nancial regulations 381
in national income 30–3	Heavily Indebted Poor Countries Initiative
and stocks 21–2	357–8
foreign bonds 154	hedging foreign exchange risk 263–4
foreign direct investment 289	herd behaviour 191–2
foreign exchange markets	horizontal spreads 281
exchange rate overshooting 249	household sector, income and capital account 32
Fisher effect 245–6
xed systems 251–2	income account, household sector 32
interest rate parity 241–4	income risk 9
nature of 235–41	indebtedness of poorer nations 357–8
and purchasing power parity 246–7	index-linked bonds 154
foreign exchange risk 234	indirect quotation in foreign exchange markets
hedging 263–4	235–7
forward contracts 279–80	ination
and options 280	and eurocurrencies 297
forward discount of foreign exchange 244	and interest rates 74, 139–45, 184–5
Forward Exchange Agreement (FXA) 305	initial margin 268
forward premium of foreign exchange 244	instrument independence 54
forward rate agreement (FRA) 264	insurance companies 93–100
forward rates of exchange 244	Insurance Companies Act (1982) 99
Frankel, J A 249, 349	insurance premiums 93

428

....

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Index

insurance risk contracts 305	liabilities
insurance services regulation 99	of banks 62
Inter-dealer brokers 158–9	creation of 7–9, 67–70
interbank market 129, 138	management of 85–8
interest rate differences among countries 245	LIBOR-in-arrears swap 305
interest rate futures 271–3	life insurance 97–100
interest rate parity 241–5	limit-down closing 270
interest rate structure 202, 221–8	limit-up closing 270
interest rate swap 301–303	liquid assets 9, 24, 39
interest rates	liquidity 9, 24, 27, 39
and bond prices 166–70	of banking system 68, 70–1, 374
liquidity preference theory of 213–5	of nancial assets 18, 19
loanable funds theory of 204–12	and government debt, sale of 24, 325–6
market segmentation 228	liquidity preference theory 213–5
and monetary policy 53, 72–4, 77–80, 138–46,	Lloyd’s of London 362, 352, 369
185, 215–20	loanable funds theory 204–12
preferred habitat 229	demand and supply of 205–6
and PSNCR 165, 176, 318–22	and liquidity preference 215
and public sector decit 165, 324–5	problems with 209–11
pure expectations theory 222–3	in uncertain economies 211–2
term premiums 224–8	local authority market 133
term structure of 153, 221	London Interbank Offer Rate (LIBOR) 130,
interest yield 152, 174	301–2, 304
intermediate targets 140	London Stock Exchange 160, 163
intermediation 6–14	Long-Term Capital Management 284–5, 298,
International Organization of Securities	352
Commissions (IOSCO) 395	long-term insurance 98–9
International Swap Dealers Association (ISDA) 394	asset holdings 96
intrinsic value of an option 277	long-term savings products 4
investment banking 160–1	lookback options 278
Investment Management Regulatory Organization
(IMRO) 371	M0 66, 75–6, 90
investment trusts 111–4	M1 90
assets 113	M2 90
irredeemable bonds 152, 169	M3 83, 90
issuing house 161	M4 66, 83, 91
	M4PS 52, 66, 72, 91
Johnson Matthey Bank 375	M5 91
junk bonds 185	Maastricht Treaty 252
	maintenance margin 269
Keynes, J M 37, 192, 213, 333, 350	mandatory reserve ratio 70
Kindleberger, C 347	margins 268–9
	marked-to-market trading of derivatives 268
lagging of bills 289	market interpretation of news 239–40
Large, A 372	market-makers
leading of bills 289	of foreign exchange 238
Leeson, N 283	of gilts 157–9
lender of last resort 56, 73, 142–3	market risk 180–2, 415–17
lending 23–5, 68–71, 73–4	market risk premium 180–2, 415–17
in national income 31–3, 37	market segmentation and interest rates 228
and wealth 26	maturity 10, 18

429

....

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Index

maturity transformation 10	noise-trader model 249, 349
Macmillan Committee 333	nominal interest rates 202–3
Maxwell, R 371	inuences on 220
M4c 91	and loanable funds theory 205–7
Merton, R. 284	non-authorised unit trusts 110
M3H 91	non-deposit-taking institutions (‘NDTIs’) 5–6,
Miller, M H 178	49–50, 92–115, 335
Minsky, H 349–51	comparisons 105, 114
Modigliani, F 178	criticisms 106
monetary aggregates (UK)	and ow of funds 114
history of 90–1
monetary base 75–80	off-balance-sheet activities 376, 392–3
control, rejected 79	offer for sale 161
monetary nancial institutions 50	offer for sale by tender 161
monetary policy	offer rate 237
conduct of 53, 138–46	open-ended fund 107
instruments 72–4, 77–80, 139–40, 185	open market operations 143–4
and money markets 138–46	options 265, 273–9
and parallel markets 136–7	trading strategies 281
and yield curve 231	options on options 278
Monetary Policy Committee 53, 145–6, 185	order-driven bond market 159
interest rate decision (2003) 209–10	order-driven equity market 163
and interest rates 295, 318	ordinary shares
monetary union in Europe 252–6	index, calculating 197
single currency (1999–2006) 256–7	prices of 187–90
UK and euro 257–8	trading in 157–8
money	Ostrovsky, A 325
aggregates, 66, 90–1	over-the-counter (OTC) trading
in aggregate demand 37–9	and exchange-traded derivatives 279
creation of	foreign exchange 264
process of 69–73	options 273
reasons for 67–9
demand for 74–5	par value 151
money illusion 208	parallel markets
money markets	commercial paper market 132–3
and monetary policy 138–46	euromarkets 134–8
participants 117–120	interbank market 129–30
money’s own rate 76, 86	market for certicates of deposit 130–2
Moody’s 185	repurchase agreements 133–4
moral hazard 95, 364–5	signicance of 136–8
multiplier, bank deposit 82	Parkin, M 54
	Parmalat 352–3
naked call (on options) 276	pattern recognition in foreign exchange markets
national debt	250
managing 59–60	‘pay as you go’ pension schemes 101, 103,
market holdings of 311	341
national savings 311, 317	pension funds 100–6
net acquisitions 33	and Maxwell affair 371
net worth 32, 35	Pension Protection Fund (PPF) 342–3
newly emerging markets 298–9	Personal Investment Authority (PIA) 104, 379
NIBM1 90	Pilbeam, K 172

430

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Index

placing 161	real interest rates 203–4
policy objectives 140	redemption yield of bonds 152, 173–4
Ponzi, C 351	nding 174
portfolio equilibrium 15–16, 27, 67	regulation of nancial markets
portfolio theory	and European Union 381–9
discounting future payments 404–7	banking industry 384–5
risk, allowing for 408–12	insurance services 388–9
preferred habitat of interest rates 229	securities market 385–8
premium margined options 273	and globalisation 389–90
premium paid options 273	theory of 365–7
present value	reinvestment risk 9
of bonds 167–9, 173–4	repurchase agreements 72
of equities 178–9	required rate of return 181–2, 406, 408
price/earnings ratio 156, 157, 189	reserve ratio 68, 71, 81
price factor on bonds 271	reserves 68, 71–2, 75–7, 78, 140–3
primary balances in public nances 314	residual maturity 151, 172
primary market 121	resistance levels in foreign exchange markets 250
private nance initiative (PFI) 316	risk-aversion 11, 181, 187, 408–9
private pension 103	risk concentration 374
protection products 4	risk in portfolio theory 408–10
prudential reserve ratio 70	risk premiums 181, 187, 408–9
PSL1 91	risk reduction 12–13, 412–16
PSL2 83, 91	risk screening 95
public decits and debt	rollover loans 294–5
attitudes to in Europe 326–8	Rome, Treaty of 381
and interest rate structure 329	running yield of bonds 152
measurement of 311–6
and open market operations 328–9	safes 305
public sector decits 322	Sandler, R 339–41
residual nancing of 323	saving 32, 40
public sector liquid assets 311	Scholes, M 284
public sector net borrowing 165	secondary market
public sector net cash requirement (PSNCR) 310,	for bonds 159
313	for equities 161–2
nancing 317–26	securities
and interest rates 324–6	prices, behaviour of 184–93
overseas sale of bonds 324	Securities and Investments Board (SIB) 369
sale of bonds to banks 323–4	securitisation 390, 396
and supply of securities 165, 176	self-regulation 366–7, 369
public sector net borrowing 313	share price index, calculating 197
public sector net debt 311	short-termism 334–7
purchasing power parity 246–7	sight deposits 55, 69
pure expectations theory 222–4	Single European Act 383–4
pure speculation 289	Solvency Ratio Directive 397
put options 274	specic risk 415–17
putable bonds 153	speculation 289
	on interest rate swaps 303
quantity theory of money 37–8	speculators 238
quanto swap 304	spending
quote-driven bond market 159	in aggregate demand 37–8
quote-driven equity market 163	and nancial wealth 32–7

431

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Index

split capital investment trusts 363–4	Tobin, J 356
spot rates of exchange 237	trading book model of capital adequacy 387
spread betting 279	transaction costs 12–14
stakeholder products 340–1	transaction exposure 262
Standard and Poor’s 185	translation exposure 262
Stock Exchange Automated Quotation system	Treaty on Economic and Monetary Union
(SEAQ) 163	(Maastricht Treaty) 252
Stock Exchange Electronic Dealing System (SETS)	trends in foreign exchange markets 250
163	turnover 93
stocks
in nancial markets 22	UK deposit insurance (2005) 58
and ows 22, 35	ultimate borrowers 23
in household sector 36	ultimate lenders 23
straddle 281	uncovered interest parity 242
strangle 281	uncovered interest rate arbitrage 243
straps 281	unfunded pension schemes 100–1
strike price 273	unit trusts 106–10
strips 155	prices and yields 108–9
Summers, L H 54	Unlisted Securities Market (USM)
support levels in foreign exchange markets 250
sustainable public debt 314	variation margin 269
swaps 301–5	velocity of circulation 37–9
swaptions 305	venture capital trusts (VCTs) 333–4
systemic risks 182–3, 387, 416–17	vertical spreads 281

tap stock 158	warrants 278–9
tap system 158	whole of life policy 98
taplets 158	wholesale banking 62, 65
taxation	Wilson Committee 333
of government bonds 160	with prots insurance policy 98
international, on capital movements 356–7	without prots insurance policy 98
of pension funds 105–6
term structure of interest rates 221	yield basis for certicates of deposit 122, 130
expectations view of 223–8	yield curve 221
signicance of 229–31	yield to maturity 152, 173–4
time deposits 71
time preference 205	zero coupon swap 305
time value of an option 277

432
	..