Title: "Financial Market Rates and Flows," Fifth Edition
Author: James C. Van Horne
Length: 292 pages
Reading time: 15 hours
Reading rating: 3 (1=very hard, 10=very easy)
Overall rating: 2 (1=average, 4=outstanding)
Reviewed by Robert F. Mulligan
Special to the Asheville Citizen-Times
This book is a graduate-level primer on investment yields and financial risk management. It falls somewhere in between a specialized reference and an MBA text. It would be helpful to MBAs and financial managers wanting to update their knowledge, or just looking for a concise financial reference.
Van Horne discusses why investments yield returns or pay interest, why rates of return differ among investments, what factors contribute to determining the return on an investment, and what causes interest rates to change. He discusses the sources and process of financial innovation, and the role of risk management in providing an impetus for innovation.
The different financial markets are introduced, as is arbitrage equilibration among markets. This is the process through which investors supply funds to purchase those assets with the highest and least-risky returns, driving the returns on the most desired assets down, and forcing the sellers of less-desirable assets to offer higher returns. Van Horne defines and illustrates various financial derivatives, including forwards, futures, options, swaps, and mortgage derivatives, and how each are used to manage financial risk.
The first half of the book presents the technical mathematics of bond interest and yields. A key to understanding the secondary market for bonds is the relationship between a bond’s price and the yield it pays. In addition to presenting a foundation of basic theory in each chapter, he also discusses the empirical evidence provided by the recent academic literature. Chapter 5 is on inflation and discusses inflation premiums, which compensate investors for the loss of value inflation causes, and introduces the Fisher equation and the difference between real and nominal interest rates.
Chapter 6 is on the term structure of interest rates, and like virtually all finance textbooks, first presents the pure expectations theory, and then introduces various complications which give greater realism. Whole chapters are devoted to various derivatives, including interest-rate futures, options, swaps, puts versus calls, and mortgage securities.
Van Horne’s chapter on foreign exchange and managing exchange rate risk is especially well done, particularly the comparison of different hedging strategies. Chapter 15, on the impact of the tax codes on the conduct of investment and the deepening – or lack thereof – of the physical capital structure. This discussion may be of less interest to practitioners than to public policy wonks, but it’s particularly important.
Most of this book will be unintelligible to anyone without college algebra, but it gives superior presentations on many financial topics which should be appreciated by its target audience of finance MBAs and other practitioners.
Robert F. Mulligan is visiting assistant professor of economics, finance, and international business in the College of Business at Western Carolina University. His research interests are monetary and international economics and he is a fierce fan of Clarkson University and ECHL ice hockey. For previously reviewed books, visit our web site at www.wcu.edu/cob/bookreviews.