ECON 356: Capital Markets - Spring 2006

General information

  • Time and place:  1:00  - 2:30 pm,  TTh,  OLRI 243
  • Instructor: Florin Bidian
  • E-mail:
  • Phone: (651) 696-6764
  • Office: C-306
  • Office hours: TTh 2:30 -3:30 pm

Prerequisites:  Economics 113 and 119.

Course objectives and synopsis:

This course will present in detail the financial system of a modern economy, with an emphasis on US. We will debunk misconceptions about the financial system, put forward even by people in key positions. Theodore Roosevelt claimed that there was no moral difference between gambling on cards or horses and gambling on the stock market. Jacques Chirac referred to currency speculation as the "AIDS of the worlds economy". Some people regard the financial system as the playground of traders able to bankrupt economies, and playing solely a nefarious role. Others concede that under normal circumstances financial markets can improve the efficiency of  the economy, however they argue that "irrational exuberance" is widespread and taints the informative role of prices and misdirects the productive resources of the economy. While these phenomena are relevant (before the collapse of the Japanese bubble, the few hundred acres around the Imperial Palace in Tokyo were valued as much as the state of California or Canada), they simply underscore the importance of the financial system and our need for understanding in-depth its workings. In this class we will see that a diversified and developed financial system helps to cushion an economy in times of stress (Alan Greenspan) and promotes growth (Levine-Zervos). A financial system is composed of financial markets and intermediaries, that perform several crucial functions: clearing and settling payments, pooling of savings, transfers across time and space, pooling of risk, reducing information costs. Finance has existed since the dawn of civilization, credit was used in Mesopotamia in 3000 BC, banks existed in Egypt in 200BC, even derivatives were traded in Amsterdam in the 17-th century. But the financial system is constantly evolving and we will keep current with the latest evolutions and even talk about the future of finance. We will start by studying financial markets (debt, equity, foreign exchange  markets) and  the go-betweens, financial institutions. Then we will talk about the watchdog of the financial system, the U.S. Central bank (FED). This enables us to understand the money supply process. To close the model of the economy, we will model the money demand and the joint determination of real variables and price level.


Rose, P.S., Marquis M.H.  Money and capital markets, 9-th edition, (McGraw-Hill, 2005)

WWW Homepage

The URL for this class is

A copy of this syllabus is available online. The homeworks will be available for downloading on the class homepage.


Homework Assignments and presentations               35%
Midterm                                              25%
Final                                                40%

I will also give up to 3% bonus points to students that enhance the quality of the class discussion.

Grading scale:























I reserve the right to lower the cutoffs but not to raise them.

There will be 6 homeworks. Each assignment is due at the beginning of class at the due date. Solutions will be posted on the due date, thus no late assignments are accepted. If  a medical certificate is provided, the average on the other homeworks will be applied towards the missed homework.  Collaboration is encouraged, however you have to submit the homework individually, and acknowledge the help you received.  Some homework will assign mini-research topics meant to shed light on contemporary events or institutions, whose findings will be presented in class. These presentations will be team work. Details will be discussed in class.

There is a midterm and a final exam. The midterm is taken during the regular class time and the final's time is listed below. All exams are closed book. No devices that can be connected to the net or that can serve as database storage (i.e. palms) are allowed. You must take the midterm and final exams at the scheduled times. Homework is a good  preparation for the exams. Make sure you are able to solve the homework problems with ease.  

Tentative Class Schedule

I will attempt to follow the schedule outlined below :





1-Jan 24

Jan 26

Introduction –overview

Financial assets and institutions

Ch 1

Ch 2


2-Jan 31

Feb 2

Information and the EMH

Future of the financial system

Ch 3

Ch 4

 HW 1 handed out

3-Feb 7

Feb 9

Determinants of interest rates

Yields and returns

Ch 5

Ch 6


4-Feb 14

Feb 16

Yield curve. Inflation

Effects of default risk and taxes

Ch 7

Ch 8

HW 2 handed out

5-Feb 21

Feb 23

Fixed income derivatives

Money market

Ch 9

Ch 10


6-Feb 28

Mar  2

Commercial banks and money markets

Federal Reserve System

Ch 11

Ch 12

HW 3 handed out 

7- Mar 7

Mar 9

Monetary policy


Ch 13



8-Mar 14,16




9-Mar 21

Mar 23

The commercial banking industry

Non-bank thrift institutions

Ch 14

Ch 15


10-Mar 28

Mar 30

Other financial institutions

Regulation of the financial institutions

Ch  16

Ch 17

 HW 4 handed out

11-Apr 4

Apr 6

Government and financial markets

Business borrowing

Ch 18

Ch 19


12-Apr 11

Apr 13

The market for corporate stock

Consumer lending and borrowing

Ch 20

Ch 21

Hw 5 handed out 

13-Apr 18

Apr 20

The residential mortgage market

Balance of payments

Ch 22

Ch 23


14-Apr 25

Apr 27

Forex market I

Forex market II

Ch 23

Ch 23

Hw 6 handed out

16- May 2


Prepare questions


May 4 (Th)

Final Exam: 1:30 PM -  3:30 PM