FINANCIALMARKETS and INSTITUTIONS
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FinancialMarketsandInstitutions, 11thEdition
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1-1RoleofFinancialMarkets,3
1-1aAccommodatingCorporateFinanceNeeds,4
1-1bAccommodatingInvestmentNeeds,4
1-1cPrimaryversusSecondaryMarkets,4
1-2SecuritiesTradedinFinancialMarkets,5
1-2aMoneyMarketSecurities,5
1-2bCapitalMarketSecurities,5
1-2cDerivativeSecurities,7
1-2dValuationofSecurities,8
1-2eSecuritiesRegulations,10
1-2fInternationalSecuritiesTransactions,11
1-2gGovernmentInterventioninFinancialMarkets,11
1-3RoleofFinancialInstitutions,12
1-3aRoleofDepositoryInstitutions,12
1-3bRoleofNondepositoryFinancialInstitutions,13
1-3cComparisonofRolesamongFinancialInstitutions,15
1-3dHowtheInternetFacilitatesRolesofFinancialInstitutions,16
1-3eRelativeImportanceofFinancialInstitutions,16
1-3fConsolidationofFinancialInstitutions,16 1-4CreditCrisisforFinancialInstitutions,19
1-4aSystemicRiskduringtheCreditCrisis,19
1-4bGovernmentResponsetotheCreditCrisis,20
1-4cConclusionaboutGovernmentResponsetotheCreditCrisis,21 TermPaperontheCreditCrisis,26
2:DETERMINATIONOFINTERESTRATES
2-1LoanableFundsTheory,29
2-1aHouseholdDemandforLoanableFunds,30
2-1bBusinessDemandforLoanableFunds,30
2-1cGovernmentDemandforLoanableFunds,32
2-1dForeignDemandforLoanableFunds,32
2-1eAggregateDemandforLoanableFunds,33
2-1fSupplyofLoanableFunds,33
2-1gEquilibriumInterestRate,35
2-2FactorsThatAffectInterestRates,37
2-2aImpactofEconomicGrowthonInterestRates,37
2-2bImpactofInflationonInterestRates,38
2-2cImpactofMonetaryPolicyonInterestRates,39
2-2dImpactoftheBudgetDeficitonInterestRates,40
2-2eImpactofForeignFlowsofFundsonInterestRates,40
2-2fSummaryofForcesThatAffectInterestRates,41
2-3ForecastingInterestRates,44
3:STRUCTUREOFINTERESTRATES 49
3-1WhyDebtSecurityYieldsVary,49
3-1aCredit(Default)Risk,49
3-1bAssessingCreditRisk,50
3-1cLiquidity,52
3-1dTaxStatus,52
3-1eTermtoMaturity,53
3-2ExplainingActualYieldDifferentials,54
3-2aYieldDifferentialsofMoneyMarketSecurities,54
3-2bYieldDifferentialsofCapitalMarketSecurities,54
3-3EstimatingtheAppropriateYield,55
3-4ACloserLookattheTermStructure,57
3-4aPureExpectationsTheory,57
3-4bLiquidityPremiumTheory,62
3-4cSegmentedMarketsTheory,64
3-4dResearchonTermStructureTheories,65
3-5IntegratingtheTheoriesofTermStructure,65
3-5aUseoftheTermStructure,66
3-5bWhytheSlopeoftheYieldCurveChanges,68
3-5cHowtheYieldCurveHasChangedoverTime,69
3-5dInternationalStructureofInterestRates,69
Part1IntegrativeProblem:InterestRateForecastsandInvestmentDecisions,77
4:FUNCTIONSOFTHEFED
4-1Overview,81
4-2OrganizationalStructureoftheFed,81
4-2aFederalReserveDistrictBanks,82
4-2bMemberBanks,82
4-2cBoardofGovernors,82
4-2dFederalOpenMarketCommittee,84
4-2eAdvisoryCommittees,84
4-2fIntegrationofFederalReserveComponents,84
4-2gConsumerFinancialProtectionBureau,84
4-3HowtheFedControlsMoneySupply,84
4-3aOpenMarketOperations,85
4-3bRoleoftheFed’sTradingDesk,88
4-3cHowFedOperationsAffectAllInterestRates,90
4-3dAdjustingtheReserveRequirementRatio,91
4-3eAdjustingtheFed’sLoanRate,92
4-4TheFed’sInterventionduringtheCreditCrisis,93
4-4aFedLoanstoFacilitateRescueofBearStearns,94
4-4bFedPurchasesofMortgage-BackedSecurities,94
4-4cFed’sPurchaseofBondsBackedbyLoans,94
4-4dFed’sPurchaseofCommercialPaper,94
4-4eFed’sPurchaseofLong-termTreasurySecurities,95
4-4fPerceptionofFedInterventionDuringtheCrisis,95
4-5GlobalMonetaryPolicy,96
4-5aASingleEurozoneMonetaryPolicy,96
4-5bGlobalCentralBankCoordination,97
5:MONETARYPOLICY
5-1MechanicsofMonetaryPolicy,103
5-1aMonitoringIndicatorsofEconomicGrowth,103
5-1bMonitoringIndicatorsofInflation,105
5-2ImplementingMonetaryPolicy,105
5-2aEffectsofaStimulativeMonetaryPolicy,105
5-2bFed’sPolicyFocusesonLong-termMaturities,109
5-2cWhyaStimulativeMonetaryPolicyMightFail,109
5-2dEffectsofRestrictiveMonetaryPolicy,112
5-2eSummaryofMonetaryPolicyEffects,113
5-3Trade-offinMonetaryPolicy,114
5-3aImpactofOtherForcesontheTrade-off,115
5-3bShiftsinMonetaryPolicyoverTime,116
5-3cHowMonetaryPolicyRespondstoFiscalPolicy,117
5-3dProposalstoFocusonInflation,118
5-4MonitoringtheImpactofMonetaryPolicy,119
5-4aImpactonFinancialMarkets,119
5-4bImpactonFinancialInstitutions,123
5-5GlobalMonetaryPolicy,123
5-5aImpactoftheDollar,123
5-5bImpactofGlobalEconomicConditions,123
5-5cTransmissionofInterestRates,123
5-5dImpactoftheCrisisinGreeceonEuropeanMonetaryPolicy,124 Part2IntegrativeProblem:FedWatching,130
PART3: DebtSecurityMarkets
6-1MoneyMarketSecurities,135
6-1aTreasuryBills,136
6-1bTreasuryBillAuction,138
6-1cCommercialPaper,139
6-1dNegotiableCertificatesofDeposit,142
6-1eRepurchaseAgreements,143
UsingtheWallStreetJournal:KeyInterestRates,144
6-1fFederalFunds,145
6-1gBanker’sAcceptances,146
6-2InstitutionalUseofMoneyMarkets,147
6-3ValuationofMoneyMarketSecurities,149
6-3aImpactofChangesinCreditRisk,150
6-3bInterestRateRisk,153
6-4GlobalizationofMoneyMarkets,154
6-4aEurodollarSecurities,155
6-4bInternationalInterbankMarket,156
6-4cPerformanceofForeignMoneyMarketSecurities,157
7:BONDMARKETS
7-1BackgroundonBonds,163
7-1aInstitutionalParticipationinBondMarkets,163
7-1bBondYields,165
7-2TreasuryandFederalAgencyBonds,165
7-2aTreasuryBondAuctions,166
7-2bTradingTreasuryBonds,166
7-2cStrippedTreasuryBonds,167
7-2dInflation-IndexedTreasuryBonds,167
7-2eSavingsBonds,168
7-2fFederalAgencyBonds,168
7-3MunicipalBonds,169
7-3aCreditRiskofMunicipalBonds,169
7-3bVariable-RateMunicipalBonds,170
7-3cTaxAdvantagesofMunicipalBonds,170
7-3dTradingandQuotationsofMunicipalBonds,170
7-3eYieldsOfferedonMunicipalBonds,171
7-4CorporateBonds,172
7-4aCorporateBondOfferings,172
UsingtheWallStreetJournal:BondYieldQuotations,173
7-4bSecondaryMarketforCorporateBonds,176
7-4cCharacteristicsofCorporateBonds,177
7-4dHowCorporateBondsFinanceRestructuring,179
7-5GlobalizationofBondMarkets,180
7-5aGlobalGovernmentDebtMarkets,180
7-5bEurobondMarket,181
7-6OtherTypesofLong-termDebtSecurities,182
7-6aStructuredNotes,182
7-6bExchange-TradedNotes,183
7-6cAuction-RateSecurities,183
8:BONDVALUATIONANDRISK
8-1BondValuationProcess,189
8-1aImpactoftheDiscountRateonBondValuation,190
8-1bImpactoftheTimingofPaymentsonBondValuation,191
8-1cValuationofBondswithSemiannualPayments,191
8-1dRelationshipsbetweenCouponRate,RequiredReturn,andBondPrice,192
8-2ExplainingBondPriceMovements,193
8-2aFactorsThatAffecttheRisk-FreeRate,194
8-2bFactorsThatAffecttheCredit(Default)RiskPremium,196
8-2cSummaryofFactorsAffectingBondPrices,197
8-2dImplicationsforFinancialInstitutions,198
8-3SensitivityofBondPricestoInterestRateMovements,199
8-3aBondPriceElasticity,199
8-3bDuration,201
8-4BondInvestmentStrategies,205
8-4aMatchingStrategy,205
8-4bLadderedStrategy,205
8-4cBarbellStrategy,205
8-4dInterestRateStrategy,205
8-5ValuationandRiskofInternationalBonds,206
8-5aInfluenceofForeignInterestRateMovements,207
8-5bInfluenceofCreditRisk,207
8-5cInfluenceofExchangeRateFluctuations,207
8-5dInternationalBondDiversification,208
8-5eEuropeanDebtCrisis,209
Appendix8:ForecastingBondPricesandYields,217
9:MORTGAGEMARKETS
9-1BackgroundonMortgages,223
9-1aHowMortgageMarketsFacilitatetheFlowofFunds,223
9-1bCriteriaUsedtoMeasureCreditworthiness,225
9-1cClassificationsofMortgages,225
9-2TypesofResidentialMortgages,226
9-2aFixed-RateMortgages,226
9-2bAdjustable-RateMortgages,228
9-2cGraduated-PaymentMortgages,229
9-2dGrowing-EquityMortgages,229
9-2eSecondMortgages,229
9-2fShared-AppreciationMortgages,229
9-2gBalloon-PaymentMortgages,229
9-3ValuationandRiskofMortgages,229
9-3aRiskfromInvestinginMortgages,230
9-4Mortgage-BackedSecurities,231
9-4aTheSecuritizationProcess,231
9-4bTypesofMortgage-BackedSecurities,231
9-4cValuationofMortgage-BackedSecurities,234
9-5MortgageCreditCrisis,234
9-5aImpactoftheCreditCrisisonFannieMaeandFreddieMac,235
9-5bSystemicRiskDuetotheCreditCrisis,236
9-5cWhoIstoBlame?,237
9-5dGovernmentProgramsImplementedinResponsetotheCrisis,239
9-5eGovernmentBailoutofFinancialInstitutions,239
9-5fFinancialReformAct,240 Part3IntegrativeProblem:AssetAllocation,245
10-1PrivateEquity,249
10-1aFinancingbyVentureCapitalFunds,249
10-1bFinancingbyPrivateEquityFunds,250
10-2PublicEquity,251
10-2aOwnershipandVotingRights,252
10-2bPreferredStock,252
10-2cParticipationinStockMarkets,253
10-2dHowInvestorDecisionsAffectStockPrices,254
10-2eInvestorRelianceonInformation,254
10-3InitialPublicOfferings,254
10-3aProcessofGoingPublic,255
10-3bUnderwriterEffortstoEnsurePriceStability,257
10-3cTimingofIPOs,257
10-3dInitialReturnsofIPOs,257
10-3eFlippingShares,258
10-3fGoogle’sIPO,258
10-3gFacebook’sIPO,259
10-3hAbusesintheIPOMarket,260
10-3iLong-TermPerformanceFollowingIPOs,261
10-4StockOfferingsandRepurchases,261
10-4aSecondaryStockOfferings,261
10-4bStockRepurchases,262
10-5StockExchanges,262
10-5aOrganizedExchanges,262
10-5bOver-the-CounterMarket,263
10-5cExtendedTradingSessions,264
10-5dStockQuotationsProvidedbyExchanges,264 UsingtheWallStreetJournal:LateTrading,266
10-5eStockIndexQuotations,267
10-5fPrivateStockExchanges,267
10-6MonitoringPubliclyTradedCompanies,268
10-6aRoleofAnalysts,269
10-6bAccountingIrregularities,269
10-6cSarbanes-OxleyAct,269
10-6dShareholderActivism,270
10-6eLimitedPowerofGovernance,271
10-7MarketforCorporateControl,272
10-7aUseofLBOstoAchieveCorporateControl,272
10-7bBarrierstotheMarketforCorporateControl,273
10-8GlobalizationofStockMarkets,273
10-8aPrivatization,273
10-8bEmergingStockMarkets,274
10-8cVariationinCharacteristicsacrossStockMarkets,274
10-8dMethodsUsedtoInvestinForeignStocks,275
11:STOCKVALUATIONANDRISK
11-1StockValuationMethods,281
11-1aPrice–EarningsMethod,281
11-1bDividendDiscountModel,282
11-1cAdjustedDividendDiscountModel,283
11-1dFreeCashFlowModel,284
11-2RequiredRateofReturnonStocks,285
11-2aCapitalAssetPricingModel,285
11-3FactorsThatAffectStockPrices,286
11-3aEconomicFactors,286
11-3bMarket-RelatedFactors,288
11-3cFirm-SpecificFactors,289
11-3dTaxEffects,289
UsingtheWallStreetJournal:BiggestStockGainsandLosses,290
11-3eIntegrationofFactorsAffectingStockPrices,290 11-4StockRisk,292
11-4aVolatilityofaStock,292
11-4bBetaofaStock,295
11-4cValueatRisk,295
11-5Risk-AdjustedStockPerformance,298
11-5aSharpeIndex,298
11-5bTreynorIndex,299
11-6StockMarketEfficiency,300
11-6aFormsofEfficiency,300
11-6bTestsoftheEfficientMarketHypothesis,300
11-7ForeignStockValuationandPerformance,301
11-7aValuationofForeignStocks,301
11-7bInternationalMarketEfficiency,302
11-7cMeasuringPerformancefromInvestinginForeignStocks,302
11-7dPerformancefromGlobalDiversification,303 Appendix11:TheLinkBetweenAccountingandStockValuation,310
12:MARKETMICROSTRUCTUREANDSTRATEGIES 319
12-1StockMarketTransactions,319
12-1aPlacinganOrder,319
12-1bMarginTrading,320
12-1cShortSelling,322
UsingtheWallStreetJournal:ShortSelling,324
12-2HowStockTransactionsAreExecuted,326
12-2aFloorBrokers,326
12-2bMarket-Makers,326
12-2cTheSpreadonStockTransactions,327
12-2dElectronicCommunicationNetworks,328
12-2eProgramTrading,330
12-3RegulationofStockTrading,331
12-3aCircuitBreakers,331
12-3bTradingHalts,331
12-3cTaxesImposedonStockTransactions,332
12-3dSecuritiesandExchangeCommission,332
12-4TradingInternationalStocks,334
12-4aReductioninTransactionCosts,334
12-4bReductioninInformationCosts,335
12-4cReductioninExchangeRateRisk,335 Part4IntegrativeProblem:StockMarketAnalysis,339
13:FINANCIALFUTURESMARKETS 343
13-1BackgroundonFinancialFutures,343
13-1aPopularFuturesContracts,343
13-1bMarketsforFinancialFutures,343
13-1cPurposeofTradingFinancialFutures,344
13-1dInstitutionalTradingofFuturesContracts,345
13-1eTradingProcess,345
13-1fTradingRequirements,346
UsingtheWallStreetJournal:InterestRateFutures,346
13-2InterestRateFuturesContracts,347
13-2aValuingInterestRateFutures,348
13-2bSpeculatinginInterestRateFutures,349
13-2cHedgingwithInterestRateFutures,351
13-3StockIndexFutures,354
13-3aValuingStockIndexFutures,354
13-3bSpeculatinginStockIndexFutures,355
UsingtheWallStreetJournal:IndexFutures,356
13-3cHedgingwithStockIndexFutures,356
13-3dDynamicAssetAllocationwithStockIndexFutures,358
13-3eArbitragewithStockIndexFutures,358
13-3fCircuitBreakersonStockIndexFutures,359
13-4SingleStockFutures,359
13-5RiskofTradingFuturesContracts,360
13-5aMarketRisk,360
13-5bBasisRisk,360
13-5cLiquidityRisk,360
13-5dCreditRisk,360
13-5ePrepaymentRisk,361
13-5fOperationalRisk,361
13-5gExposureofFuturesMarkettoSystemicRisk,361
13-6GlobalizationofFuturesMarkets,362
13-6aNon-U.S.ParticipationinU.S.FuturesContracts,362
13-6bForeignStockIndexFutures,362
13-6cCurrencyFuturesContracts,363
14:OPTIONMARKETS 369
14-1BackgroundonOptions,369
14-1aComparisonofOptionsandFutures,370
14-1bMarketsUsedtoTradeOptions,370
14-1cHowOptionTradesAreExecuted,371
14-1dTypesofOrders,371
14-1eStockOptionQuotations,371
14-1fInstitutionalUseofOptions,372
14-2DeterminantsofStockOptionPremiums,372
14-2aDeterminantsofCallOptionPremiums,373
14-2bDeterminantsofPutOptionPremiums,374
14-2cHowOptionPricingCanBeUsedtoDeriveaStock’sVolatility,375
14-2dExplainingChangesinOptionPremiums,376
14-3SpeculatingwithStockOptions,376
14-3aSpeculatingwithCallOptions,377
14-3bSpeculatingwithPutOptions,380
14-3cExcessiveRiskfromSpeculation,381
14-4HedgingwithStockOptions,383
14-4aHedgingwithCoveredCallOptions,383
14-4bHedgingwithPutOptions,383
14-5OptionsonETFsandStockIndexes,385
14-5aHedgingwithStockIndexOptions,385
14-5bUsingIndexOptionstoMeasuretheMarket’sRisk,387
14-6OptionsonFuturesContracts,388
14-6aSpeculatingwithOptionsonFutures,388
14-6bHedgingwithOptionsonInterestRateFutures,390
14-6cHedgingwithOptionsonStockIndexFutures,391
14-7OptionsasExecutiveCompensation,392
14-7aLimitationsofOptionCompensation,392
14-8GlobalizationofOptionsMarkets,393
14-8aCurrencyOptionsContracts,393 Appendix14:OptionValuation,400
15:SWAPMARKETS
15-1Background,409
15-1aUseofSwapsforHedging,410
15-1bUseofSwapsforSpeculating,411
15-1cParticipationbyFinancialInstitutions,411 15-2TypesofInterestRateSwaps,412
15-2aPlainVanillaSwaps,412
15-2bForwardSwaps,414
15-2cCallableSwaps,415
15-2dPutableSwaps,415
15-2eExtendableSwaps,416
15-2fZero-Coupon-for-FloatingSwaps,417
15-2gRate-CappedSwaps,417
15-2hOtherTypesofSwaps,418
15-3RisksofInterestRateSwaps,420
15-3aBasisRisk,420
15-3bCreditRisk,420
15-3cSovereignRisk,421
15-4PricingInterestRateSwaps,421
15-4aPrevailingMarketInterestRates,421
15-4bAvailabilityofCounterparties,421
15-4cCreditandSovereignRisk,422 15-5PerformanceofInterestRateSwaps,422 15-6InterestRateCaps,Floors,andCollars,423
15-6aInterestRateCaps,423
15-6bInterestRateFloors,424
15-6cInterestRateCollars,425 15-7CreditDefaultSwaps,426
15-7aSecondaryMarketforCDSContracts,427 15-7bCollateralonCDSContracts,427
15-7cPaymentsonaCreditDefaultSwap,427
15-7dHowCDSContractsAffectDebtor-CreditorNegotiations,428
15-7eDevelopmentoftheCDSMarket,428
15-7fImpactoftheCreditCrisisontheCDSMarket,428 15-7gReformofCDSContracts,430
15-8GlobalizationofSwapMarkets,430
15-8aCurrencySwaps,431
16:FOREIGNEXCHANGEDERIVATIVEMARKETS
16-1ForeignExchangeMarkets,439
16-1aInstitutionalUseofForeignExchangeMarkets,439
16-1bExchangeRateQuotations,440
16-1cTypesofExchangeRateSystems,441
16-1dEurozoneArrangement,442
16-1eAbandoningtheEuro,443
16-2FactorsAffectingExchangeRates,443
16-2aDifferentialInflationRates,444
16-2bDifferentialInterestRates,444
16-2cCentralBankIntervention,445
16-3ForecastingExchangeRates,446
16-3aTechnicalForecasting,447
16-3bFundamentalForecasting,447
16-3cMarket-BasedForecasting,447
16-3dMixedForecasting,448
16-4ForeignExchangeDerivatives,448
16-4aForwardContracts,448
16-4bCurrencyFuturesContracts,449
16-4cCurrencySwaps,450
16-4dCurrencyOptionsContracts,450
16-4eUseofForeignExchangeDerivativesforHedging,450
16-4fUseofForeignExchangeDerivativesforSpeculating,451
16-5InternationalArbitrage,453
16-5aLocationalArbitrage,453
16-5bTriangularArbitrage,453
16-5cCoveredInterestArbitrage,454 Appendix16:CurrencyOptionPricing,460 Part5IntegrativeProblem:ChoosingamongDerivativeSecurities,464 MidtermSelf-Exam,466
PART6: CommercialBanking
17:COMMERCIALBANKOPERATIONS
17-1BackgroundonCommercialBanks,475
17-1aBankMarketStructure,475
17-2BankSourcesofFunds,476
17-2aTransactionDeposits,477
17-2bSavingsDeposits,477
17-2cTimeDeposits,478
17-2dMoneyMarketDepositAccounts,478
17-2eFederalFundsPurchased,478
17-2fBorrowingfromtheFederalReserveBanks,479
17-2gRepurchaseAgreements,479
17-2hEurodollarBorrowings,480
17-2iBondsIssuedbytheBank,480
17-2jBankCapital,480
17-2kDistributionofBankSourcesofFunds,481
17-2lCash,482
17-2mBankLoans,482
17-2nInvestmentinSecurities,486
17-2oFederalFundsSold,487
17-2pRepurchaseAgreements,487
17-2qEurodollarLoans,487
17-2rFixedAssets,487
17-2sProprietaryTrading,487
17-2tSummaryofBankUsesofFunds,488
17-3Off–BalanceSheetActivities,490
17-3aLoanCommitments,490
17-3bStandbyLettersofCredit,491
17-3cForwardContractsonCurrencies,491
17-3dInterestRateSwapContracts,491
17-3eCreditDefaultSwapContracts,491 17-4InternationalBanking,492
17-4aInternationalExpansion,492
17-4bImpactoftheEuroonGlobalCompetition,492
17-4cInternationalExposure,493
18:BANKREGULATION
18-1Background,497
18-2RegulatoryStructure,497
18-2aRegulators,498
18-2bRegulationofBankOwnership,498
18-3RegulationofBankOperations,498
18-3aRegulationofDepositInsurance,498
18-3bRegulationofDeposits,500
18-3cRegulationofBankLoans,500
18-3dRegulationofBankInvestmentinSecurities,501
18-3eRegulationofSecuritiesServices,501
18-3fRegulationofInsuranceServices,502
18-3gRegulationofOff–BalanceSheetTransactions,503
18-3hRegulationoftheAccountingProcess,503
18-4RegulationofCapital,504
18-4aHowBanksSatisfyRegulatoryRequirements,504
18-4bBaselIAccord,505
18-4cBaselIIFramework,505
18-4dBaselIIIFramework,506
18-4eUseoftheVaRMethodtoDetermineCapitalLevels,506
18-4fStressTestsImposedtoDetermineCapitalLevels,507
18-4gGovernmentInfusionofCapitalduringtheCreditCrisis,507
18-5HowRegulatorsMonitorBanks,508 18-5aCAMELSRatings,508
18-5bCorrectiveActionbyRegulators,511 18-5cFundingtheClosureofFailingBanks,511 18-6GovernmentRescueofFailingBanks,511 18-6aArgumentforGovernmentRescue,512 18-6bArgumentagainstGovernmentRescue,512 18-6cGovernmentRescueofBearStearns,512 18-6dFailureofLehmanandRescueofAIG,513 18-6eProtestsofBankBailouts,513 18-7FinancialReformActof2010,514 18-7aMortgageOrigination,514 18-7bSalesofMortgage-BackedSecurities,514 18-7cFinancialStabilityOversightCouncil,514 18-7dOrderlyLiquidation,515
18-7eConsumerFinancialProtectionBureau,515 18-7fLimitsonBankProprietaryTrading,515 18-7gTradingofDerivativeSecurities,516 18-8GlobalBankRegulations,516
19:BANKMANAGEMENT
19-1BankGoals,Strategy,andGovernance,521 19-1aAligningManagerialCompensationwithBankGoals,521 19-1bBankStrategy,522
19-1cBankGovernancebytheBoardofDirectors,522 19-1dOtherFormsofBankGovernance,523
19-2ManagingLiquidity,523
19-2aManagementofLiabilities,523
19-2bManagementofMoneyMarketSecurities,524 19-2cManagementofLoans,524
19-2dUseofSecuritizationtoBoostLiquidity,524
19-3ManagingInterestRateRisk,525
19-3aMethodsUsedtoAssessInterestRateRisk,525
19-3bWhethertoHedgeInterestRateRisk,530
19-3cMethodsUsedtoReduceInterestRateRisk,532 19-3dInternationalInterestRateRisk,535
19-4ManagingCreditRisk,535
19-4aMeasuringCreditRisk,535
19-4bTrade-offbetweenCreditRiskandReturn,536 19-4cReducingCreditRisk,537
19-5ManagingMarketRisk,538
19-5aMeasuringMarketRisk,538
19-5bMethodsUsedtoReduceMarketRisk,539
19-6IntegratedBankManagement,539 19-6aApplication,539
19-7ManagingRiskofInternationalOperations,543 19-7aExchangeRateRisk,543 19-7bSettlementRisk,544
521
20:BANKPERFORMANCE
20-1ValuationofaCommercialBank,551
20-1aFactorsThatAffectCashFlows,551
20-1bFactorsThatAffecttheRequiredRateofReturnbyInvestors,553
20-1cImpactoftheCreditCrisisonBankValuations,554
20-2AssessingBankPerformance,554
20-2aInterestIncomeandExpenses,555
20-2bNoninterestIncomeandExpenses,556
20-3EvaluationofaBank’sROA,557
20-3aReasonsforaLowROA,558
20-3bConvertingROAtoROE,559
20-3cApplication,560
Part6IntegrativeProblem:ForecastingBankPerformance,566
PART7: NonbankOperations
21:THRIFTOPERATIONS
21-1BackgroundonSavingsInstitutions,573
21-1aOwnershipofSavingsInstitutions,573
21-1bRegulationofSavingsInstitutions,574
21-2SourcesandUsesofFunds,575
21-2aSourcesofFunds,575
21-2bUsesofFunds,575
21-2cBalanceSheetofSavingsInstitutions,576
21-2dInteractionwithOtherFinancialInstitutions,577
21-2eParticipationinFinancialMarkets,578
21-3ValuationofaSavingsInstitution,578
21-3aFactorsThatAffectCashFlows,579
21-3bFactorsThatAffecttheRequiredRateofReturn,580 21-4ExposuretoRisk,580
21-4aLiquidityRisk,581
21-4bCreditRisk,581
21-4cInterestRateRisk,582
21-5ManagementofInterestRateRisk,584
21-5aAdjustable-RateMortgages,584
21-5bInterestRateFuturesContracts,584
21-5cInterestRateSwaps,584
21-5dConclusionsaboutManagingInterestRateRisk,585
21-6ExposureofSavingsInstitutionstoCrises,585
21-6aSavingsInstitutionCrisisintheLate1980s,585
21-6bCreditCrisisof2008 2009,586
21-6cReforminResponsetotheCreditCrisis,587
21-7CreditUnions,588
21-7aOwnershipofCreditUnions,588
21-7bAdvantagesandDisadvantagesofCreditUnions,588
21-7cDepositInsuranceforCreditUnions,589
21-7dRegulatoryAssessmentofCreditUnions,589
21-7eCreditUnionSourcesofFunds,590
21-7fCreditUnionUsesofFunds,590
21-7gExposureofCreditUnionstoRisk,590
22:FINANCECOMPANYOPERATIONS 597
22-1TypesofFinanceCompanies,597
22-1aConsumerFinanceCompanies,597
22-1bBusinessFinanceCompanies,597
22-1cCaptiveFinanceSubsidiaries,598
22-2SourcesandUsesofFunds,598
22-2aSourcesofFunds,598
22-2bUsesofFinanceCompanyFunds,599
22-2cInteractionwithOtherFinancialInstitutions,601
22-3ValuationofaFinanceCompany,602
22-3aFactorsThatAffectCashFlows,602
22-3bFactorsThatAffecttheRequiredRateofReturn,603
22-4ExposureofFinanceCompaniestoRisk,604
22-4aLiquidityRisk,604
22-4bInterestRateRisk,605
22-4cCreditRisk,605
22-5MultinationalFinanceCompanies,605
23:MUTUALFUNDOPERATIONS 609
23-1BackgroundonMutualFunds,609
23-1aPricingSharesoftheMutualFund,610
23-1bMutualFundDistributionstoShareholders,611
23-1cRegulationofMutualFunds,611
UsingtheWallStreetJournal:MutualFundQuotations,612
23-1dManagementofMutualFunds,613
23-1eExpensesIncurredbyMutualFundShareholders,614
23-1fGovernanceofMutualFunds,616
23-1gMutualFundCategories,617
23-1hStockMutualFundCategories,618
23-1iBondMutualFundCategories,619
23-1jAssetAllocationFunds,620
23-1kGrowthandSizeofMutualFunds,620
23-2PerformanceofMutualFunds,621
23-2aValuationofStockMutualFunds,621
23-2bValuationofBondMutualFunds,623
UsingtheWallStreetJournal:PerformanceofMutualFunds,624
23-2cPerformancefromDiversifyingamongFunds,624
23-2dRatingsonMutualFunds,624
23-2eResearchonMutualFundPerformance,625
23-3MoneyMarketFunds,625
23-3aAssetCompositionofMoneyMarketFunds,627
23-3bRiskofMoneyMarketFunds,627
23-3cManagementofMoneyMarketFunds,627
23-4OtherTypesofFunds,628
23-4aClosed-EndFunds,628
23-4bExchange-TradedFunds,629
23-4cVentureCapitalFunds,630
UsingtheWallStreetJournal:Exchange-TradedFunds,631
23-4dPrivateEquityFunds,632
23-4eHedgeFunds,633
23-4fRealEstateInvestmentTrusts,636
24:SECURITIESOPERATIONS
24-1FunctionsofSecuritiesFirms,641
24-1aFacilitatingStockOfferings,641
24-1bFacilitatingBondOfferings,643
24-1cSecuritizingMortgages,645
24-1dAdvisingCorporations,645
24-1eFinancingforCorporations,646
24-1fProvidingBrokerageServices,646
24-1gOperatingMutualFunds,647
24-1hProprietaryTrading,648
24-1iSummaryofServicesProvided,648
24-1jInteractionwithOtherFinancialInstitutions,649
24-1kParticipationinFinancialMarkets,650
24-1lConflictsofInterestfromParticipation,650
24-1mExpandingFunctionsInternationally,651
24-2RegulationofSecuritiesFirms,652
24-2aStockExchangeRegulations,652
24-2bRegulatoryEventsThatAffectedSecuritiesFirms,653
24-3ValuationofaSecuritiesFirm,654
24-3aFactorsThatAffectCashFlows,655
24-3bFactorsThatAffecttheRequiredRateofReturn,655
24-4ExposureofSecuritiesFirmstoRisk,656
24-4aMarketRisk,656
24-4bInterestRateRisk,657
24-4cCreditRisk,657
24-4dExchangeRateRisk,657
24-4eImpactofFinancialLeverageonExposuretoRisk,657
24-5ImpactoftheCreditCrisisonSecuritiesFirms,658
24-5aGovernmentAssistancetoBearStearns,658
24-5bFailureofLehmanBrothers,660
24-5cImpactoftheCrisisonRegulatoryReform,661
25:INSURANCEANDPENSIONFUNDOPERATIONS
25-1Background,667
25-1aDeterminantsofInsurancePremiums,667
25-1bInvestmentsbyInsuranceCompanies,669
25-1cRegulationofInsuranceCompanies,669
25-2LifeInsuranceOperations,671
25-2aOwnership,671
25-2bTypesofLifeInsurance,671
25-2cSourcesofFunds,672
25-2dCapital,673
25-2eUsesofFunds,673
25-2fAssetManagementofLifeInsuranceCompanies,675
25-2gInteractionwithOtherFinancialInstitutions,676
25-3OtherTypesofInsuranceOperations,677
25-3aPropertyandCasualtyInsurance,677
25-3bHealthCareInsurance,679
25-3cBusinessInsurance,680
25-3dBondInsurance,680
25-3eMortgageInsurance,681
25-4ExposureofInsuranceCompaniestoRisk,681
25-4aInterestRateRisk,682
25-4bCreditRisk,682
25-4cMarketRisk,682
25-4dLiquidityRisk,682
25-4eExposuretoRiskduringtheCreditCrisis,682
25-4fGovernmentRescueofAIG,683
25-5ValuationofanInsuranceCompany,683
25-5aFactorsThatAffectCashFlows,683
25-5bFactorsThatAffecttheRequiredRateofReturnbyInvestors,684
25-5cIndicatorsofValueandPerformance,684
25-6BackgroundonPensionFunds,686
25-6aPublicversusPrivatePensionFunds,686
25-6bDefined-BenefitversusDefined-ContributionPlans,686
25-6cPensionFundParticipationinFinancialMarkets,688
25-6dPensionRegulations,689
25-7PensionFundManagement,691
25-7aManagementofInsuredversusTrustPortfolios,691
25-7bManagementofPortfolioRisk,692
25-7cCorporateControlbyPensionFunds,693
25-8PerformanceofPensionFunds,693
25-8aPensionFund’sStockPortfolioPerformance,693
25-8bPensionFund’sBondPortfolioPerformance,693
25-8cPerformanceEvaluation,694
25-8dPerformanceofPensionPortfolioManagers,695 Part7IntegrativeProblem:AssessingtheInfluenceofEconomicConditionsacross aFinancialConglomerate’sUnits,699 FinalSelf-Exam,700
AppendixA:ComprehensiveProject,705
AppendixB:UsingExceltoConductAnalyses,715 Glossary,719 Index,730
THE STORY OF GORUBA
Royce, when the negro left him, was breathless from the struggle. But he had the presence of mind to run back to the room where he had passed the night, pick up his rifle and revolver from the floor, and hurry to the entrance. There John met him. The anxious alarm on the Hausa's face gave way to a broad smile when he saw that his master was safe.
"Where is that ruffian?" asked Royce, looking round for his assailant.
"Him run away quick," replied John, pointing to the bushes. "Berry much 'fraid of me."
"You were just in time, John. He was crushing me to a jelly. It's a lesson to me not to part with my revolver for an instant. You saw no other black men about?"
"No, sah. Him berry big chap, sure 'nuff."
"A giant! I am bruised all over. I met him as I was coming out for a bathe, and he sprang at me at once. Why should he do that?"
"Bad fella, sah."
"I daresay; but it was something more than original sin. He went for me with as much ferocity as an eagle whose nest I disturbed once. Does this place belong to him, I wonder?"
John could only repeat that the man was a "bad fella." But Royce felt a good deal puzzled. The negro's savage onslaught might be explained by his regarding the white man as a robber, but there appeared to be nothing in the place worth stealing. It was strange that he should have so fiercely resented what was, after all, an innocent intrusion.
"We'll have another look round before we start," said Royce. "Or, rather, I will. You keep guard at the doorway, John, and call me if you see anyone moving about outside."
Royce searched the building thoroughly. The result confirmed his overnight impression, that it was in a fair state of preservation. But there was nothing in any of the rooms to indicate present or even remote occupation. Except for fragments of stone and rubble, they were bare. There was nothing to tempt a robber. Royce could only conclude that the man had attacked him from an instinct of self-preservation. What had led him to enter the building was a mystery.
Royce returned to John, who during his absence had kindled a fire, skinned the rabbit, and set it to roast. They made a good breakfast, then started in the direction of the village where Royce hoped to purchase food for his men.
"We must keep a good look-out," he said, "in case that fellow should be one of a band prowling about here. He won't be difficult to recognise. There can't be many men of his height and size. And if there were, I should know him again by some strange marks on his face. Why do these black men gash themselves, John?"
"To make him look pretty, sah."
"Um! They've a queer notion of beauty, then."
Anxious to accomplish his errand and return to Challis, Royce pushed on as rapidly as possible. The country was pathless, for the most part flat, with undulations here and there, covered with thick bush varied by an occasional gum-tree. Drysdale's rough sketch-map gave him little more than a bare direction, and he had to trust a good deal to luck. After three hours' steady marching, which ought to have brought them to the village, if the estimate of its distance were correct, they were still in the same wild, barren country, without a sign of mankind. It seemed probable that they had overshot the mark, so, after taking a short rest, they altered their direction in the hope of discovering a path.
It was late in the afternoon, and they were very tired, when at last they struck into a narrow, beaten track, far to the left of their original course.
"This looks promising," said Royce. "We'll make a spurt, John."
Another half-hour brought them to cultivated fields. Crossing these, they found themselves faced by a mud wall, fourteen or fifteen feet high, pierced by a single gate. This was closed.
"It's a town, after all," said Royce; "not a village. So much the better, if the people are friendly. Give them a call, John."
JOHN ADDRESSES THE SENTRY
The Hausa let out his long yodelling cry. A head was seen peering over the top of the wall. John lifted both hands, and spread them, palms open, as a sign of friendliness; then began an address in the native tongue, somewhat as follows:
"Ho, you admirable watchman of a noble chief! Tell your kind and worthy lord that a stranger from the lands of the Great White King seeks to look upon his face, and have a friendly talk with him. My lord and master is a very great man, with horses and cattle in number as the grains in a cornfield, and it is a great honour that he does to your chief. Open, then, your gate, and let this great lord enter; and, as he passes, let your people fall to the ground, and throw earth upon their bodies, as befits folk who are but as worms in his sight."
Unconscious of the extravagant claims made on his behalf, Royce leant on his rifle, waiting. The head disappeared. Some minutes elapsed; then the watchman came back to his perch, and a long conversation ensued between him and the Hausa, who grew more and more excited, and raised his voice until it became almost a yell.
"What is it all about?" asked Royce, beginning to suspect that his man was growing impolite.
"Son of a dog, dat fella!" replied John indignantly. "He want to know too much. Talk 'bout sah's father and mother, how many wives, what he come for, too much!"
"Did you tell him I want to buy food?"
"No, sah; I tell him——"
"Then do so at once," Royce interrupted sternly.
In a more subdued tone of voice, John gave his message. The man again withdrew.
After another interval, the gate was thrown open, and Royce, entering, found himself among a band of stalwart natives, carrying long, broad-bladed spears, and marked on each cheek, near the ear, with five or six narrow cuts,
the badge of their tribe. Escorted by them, and watched by a curious crowd of townsfolk, Royce proceeded to the chief's large mud house in the centre of the town.
On entering he was greeted with the words: "Sanu, bature!" (Hail, white man!) from a stout, pleasant-faced, bearded black man, somewhat past middle age, who motioned to him to be seated, and ordered one of his slaves to bring forward a present of a roasted fowl.
The customary salutations passed between host and visitor. Royce had already learnt to endure this lengthy ceremony with patience. It was something like this:
John: "Hail, chief! Is it well with you?"
Chief: "It is well."
John: "Allah be praised! Is it well with your wives?"
Chief: "It is well."
John: "Allah be praised! Is it well with your children?"
Chief: "It is well."
John: "Allah be praised! And your horses?"
Chief: "It is well."
John: "Allah be praised! And your cattle?"
Chief: "They are well."
John: "Allah be praised! Your house and all that is yours?"
Chief: "All is well."
John: "Allah be praised!"
And then they got to business. The chief apologised for the delay in opening the gate. His watchmen had to be careful, because it was reported that Tubus were in the neighbourhood. A few days before a fugitive had come in from the westward, and told how his village had been raided and destroyed. From the chief's description, Royce gathered that this was the village which he had himself seen, and near which Challis was encamped.
Royce then explained the object of his visit, instructing John to translate exactly what he said, without adding or subtracting anything. The chief at once agreed to sell a quantity of millet and manioc for the men, and to present Royce with a few dozen eggs—an offer which Royce gracefully accepted, though he knew that most of the eggs would turn out to be bad. The African native can never understand the white man's squeamishness in the matter of addled eggs.
The next question was about the transportation of the food to the camp, nearly twenty miles distant. At first the chief, for fear of the Tubus, was reluctant to supply carriers. But when Royce explained that there had been no sign of Tubus on the way, and that the area of their depredations appeared to be considerably to the west, he yielded, and gave orders for the food to be loaded into calabashes, and for a dozen slaves to be ready to start with them in the morning.
It was clearly too late for a start to be made that evening, though Royce was very anxious to get back to his friend. He accepted the chief's hospitality for the night, and, though very tired, kept up a tedious conversation with him through John. In the course of this he related the incident of the early morning.
The chief seemed amused at the thought of a wrestling match between an Englishman and a negro, and laughed heartily at the negro running away on hearing John's cry, "Yoi-aloo!" which he made the Hausa repeat again and again. But his amusement soon gave place to alarm, his smiles to a look of thoughtfulness. He had asked Royce to describe the negro. He seemed little impressed by details of the man's height and size, but when Royce mentioned that he had noticed two straight cuts down the middle of each cheek he uttered a sudden, sharp exclamation.
"Goruba!"
"What does he mean by Goruba?" asked Royce of John, after a brief silence.
The chief seemed to deliberate whether he should speak or not. At last he said:
"I will tell the white man—my friend. Years ago I was chief of only a small village, and lord of little wealth. And I sought to increase my wealth by prudent trading, to which end I hunted the elephant, and sold his tusks to merchants from the East. And one time, having got together some few tusks in readiness for the barter, I was beset in my village by a horde of strange warriors, armed with guns, a terror to all my people. And these evil-doers came to me and made me captive, and demanded that I should deliver up to them those few tusks which were the spoil of my hunting. And, when I refused, they treated me shamefully and cruelly, so that I bear the marks on my body to this day. And there was no help for me, no hope of deliverance; and then, for the safety of my life, I was fain to yield, and saw myself robbed of the treasure that had fallen to my spear.
"And the captain of those wretches, he that put me to the torture, was a man of vast stature and the strength of a giant, Goruba by name. He was from the east country, the slave of Rabeh, King of Dar Runga, who laid waste all the lands on this side of the great lake, and whose warriors were as locusts on the face of the earth.
"It was a good day for all this country when Rabeh was slain, and his men were scattered to the winds. I knew not what had become of Goruba, one of his chiefest captains; but in very truth it was he that laid hands on you, for his stature and those marks upon his cheeks betray him. And this news that you give me is heavy upon my heart, for without doubt Goruba is again prowling like a lion about these lands, and many a village will fall a prey to him."
Royce did his best to reassure the chief, pointing out that Goruba had been alone, and there was no evidence that he was the leader of any considerable body of men. This somewhat heartened the old man, who
declared, however, that he would henceforth be doubly watchful, and advised the white man to leave the country as soon as possible.
"I shall go at my own time," said Royce quietly. "I thank you for your warning, and will do what I can to repay your kindness."
Next morning he left the village with John and a dozen carriers, well loaded with food-stuffs, and hastened at his best pace to rejoin his friend.
CHAPTER IV
RUSHED BY TUBUS
Challis, after Royce had left him, felt somewhat uneasy. Royce had spoken hopefully of getting back on the following day, but Challis, remembering the difficulties of finding the way in a strange country, was pretty sure that Royce had overestimated his powers, and was prepared to be left in sole charge for at least two days, and perhaps three. It was not a pleasant prospect, for the raiders could not be very far away, and the possibility of being attacked was disturbing. He kept a smiling face, however, and said nothing about his anxieties to the boys.
The first thing to do was to form as secure a camp as possible. The camping arrangements had been interrupted by the discussion leading to Royce's departure. As soon as Royce was gone, Challis took the matter in hand.
The spot which Royce had suggested as suitable for the camp was a knoll, on which a few palm-trees grew, at one end of the village, and Challis was rather surprised to find that, during his conversation with Royce, the Hausas had not made a start. Wearing woe-begone expressions on their faces, they were squatting beside their packages.
"Now, Kulana," said Challis to the second in command, "what are you all idling for? Carry the stuff to those palm-trees yonder."
The men got up obediently, but they appeared to have a strange hesitation in lifting their loads.
"Come, come!" said Challis. "I know that you are done up, but you are not so bad as all that. Besides, it's only a few yards away, and the sooner we form camp the sooner you'll get to sleep."
There was a murmuring among them. Still they did not offer to lift the bundles.
Challis curbed his rising anger. The men were usually so willing that he wished not to be hard on them. And both Royce and he had already taken much interest in studying the queer moods and ideas of these Africans.
"What is troubling them, Kulana?" he asked quietly.
The Hausa looked him full in the face, and, seeing no anger there, replied:
"No want camp dar, sah—berry bad place."
"Oh! Why is that?"
And then the man began to pour out an explanation of which at first Challis could make nothing. Kulana's English was not adequate to express his thoughts. He talked of "debbils" and "bad medicine," and went through a pantomime of gestures expressing fear and fright, the other men listening intently, and murmuring approval now and then.
After a time, however, Challis had a glimmering of light.
"You think the spirits of the dead men haunt the village—is that it? And you are afraid they will come and bother you during the night?"
"Sah savvy all 'bout it," said the man, delighted that his meaning was understood.
The others clapped their hands, and looked much more cheerful.
"Well, I don't want you to see black ghosts, I'm sure," Challis went on. "I don't know that I'd like to see them myself. We'll find another place."
The men shouted, and springing to their feet, hoisted their loads with alacrity. Challis reflected that the work of constructing a camp more in the open would be good for them, preventing them from brooding over their troubles, real and imaginary.
After a rapid glance around, he led them to an open spot at some little distance from the village, and ordered them to make a small zariba with branches from the bushes around. It was an excellent situation for a camp. Its openness rendered it possible to detect the approach of an enemy, and a small stream running close by furnished an ample supply of water.
As he had expected, the work of cutting the bushes took the men's minds from their misfortunes. They soon began to chatter with their usual cheerfulness. By nightfall they had constructed a thick fence six feet high and several yards square. The tent was erected in the middle of the enclosure, the baggage was placed against one of the walls, and the men, tired out, but no longer despondent, were ready for their supper.
Challis dealt out pills to the ailing ones, promised them all a long rest on the following day, and spoke confidently of the speedy return of his companion with ample supplies. He arranged for the watching of the camp during the night, and, as an extra precaution, set his alarm clock, when he himself turned in, so that it wakened him in an hour. Then he took a look round, set the clock again for an hour ahead, and so on, through the night. He enjoyed the inestimable power of sleeping at any minute.
The night passed quietly. In the morning, Challis sent two of the men outside the zariba to fetch water and to take a look round.
When they returned they were rather excited. They explained that they had made two discoveries. One was that across the stream lay an extensive swamp, upon which they had seen a large flock of birds pecking for worms.
The other was that a little farther off was a banana plantation, which had escaped the ravages of the raiders.
"Good boys!" said Challis. "We will make some use of your news by and by."
The presence of the birds and the bananas afforded a welcome opportunity of replenishing their scanty larder. Challis decided to go out and try his skill as a sportsman. There would be some risk, of course, that the noise of his gun might attract the notice of undesirable visitors; but there was very little food of any kind left, and poultry would be a treat to the men. In view of the possibility of Royce's return being delayed, it seemed too good a chance to be neglected. Besides, he reflected, there was no other village in the neighbourhood, and the raiders, having accomplished their destructive work only too completely, were probably by this time far away. After he had made a bag of birds, he would send out some men to gather bananas, and the party would revel in a regular banquet.
Accordingly, he ordered Kulana to keep a careful watch, and on no account to allow the men to move outside the zariba; then, taking his shotgun, he set out for the swamp, with the two who had brought the information, to retrieve the game.
The swamp was half-a-mile away, and Challis found it necessary to walk round it for some distance before he could get a fair shot at the birds, which had settled down in a bed of rushes. They appeared to be a variety of pigeon, a delicacy which the men would appreciate after living almost wholly on meal.
When he had located the game, he sent his men forward to start them. The instant they rose in the air he let fly with both barrels in rapid succession, and brought down a bird with each shot. Following up the rest of the covey until they settled again, he killed another brace, and so went on for nearly an hour, until there were as many birds as the men could carry.
His success had quite banished the misgivings with which he had started. Picturing the delight of his boys at getting a whole day's good eating, he had
given the order to return, and was half-way back to camp, when he was startled by a great shouting and commotion from its direction.
Sprinting on at full speed, he was just in time to see a number of his boys running across the open space in front of the zariba, closely pursued by a dozen horsemen. The runners, who appeared to be laden with bananas, darted into the enclosure through the gap they had left in the fence; but before they could draw the rough gate across it, the foremost horsemen galloped through at their heels.
Challis guessed in a moment what had happened. The men's appetite had been whetted by the report of the nearness of a banana plantation. They had been too childishly impatient to await his return, and, either with Kulana's consent or in defiance of him, they had gone out to gather the fruit, only to be surprised by some wandering tribe.
He rushed impetuously across the open space to the support of his men, not staying to reflect that he could do nothing really effective. Besides his shot-gun, he carried a revolver. The horsemen had fire-arms, which they had not used as yet, feeling no doubt that their swords were sufficient for the work in hand. Some of the Hausas had rifles, but it was clear that they were too much paralysed by the appearance of a mounted enemy to make use of them. They were yelling with fright.
Before Challis was half-way to the zariba, a second party of horsemen broke from cover in the direction of the village, and rode straight at him. Flinging up his shot-gun, he emptied the barrels almost at random; then drew his revolver. But at that moment a shot from the pistol of one of the galloping horsemen struck him above the wrist, and the revolver fell to the ground. In another second he was spun round by the impact of a horse's shoulder, reeled, and fell. The horsemen galloped over him on their way to the zariba, and before he lost consciousness it seemed to him that he had been kicked and trampled by a hundred hoofs.
