YangRMFICh00 - NoNotes.pptx - Finance 5312 Financial...

This preview shows page 1 - 18 out of 57 pages.

Finance 5312 Financial Institutions- Risk Management Instructor: Fan Yang University of Connecticut 1
Instructor: Fan Yang Assistant Professor at UConn, 2015-present Assistant Professor at the University of Hong Kong, 2011-2015 Finance PhD from University of Minnesota, 2011 M.Sc. in physics from McGill University, 2005 B.S. in physics from Peking University, 2003 Research interests: Theoretical and empirical asset pricing, including stock returns, credit risk, commodity futures, and macroeconomics. 2
Places That I Have Lived for More Than 1 Year 3
First Day Survey Your name Your background (e.g. undergraduate major, years of working experience) If you have work experience in finance, please give a short description. Any special topics you are interested in 4
Course Website HuskyCT Lecture Notes Assignments Assignment Solutions Others 5
Textbook John C. Hull, Risk Management and Financial Institutions (Fourth Edition) 6
A Brief Review of FINA101 Chapter 0 7
What is Finance? A typical firm is a group of projects. Apple: iPhone, iPad, Mac Tesla: Model S/X/3 How does a firm fund ( finance ) these projects? Internal Retained earnings Cash reserves External Equity: Stocks/private equity Debt: Bonds/bank loans/commercial papers etc. Two major sources of external financing Financial markets Banks 8
Other Type of Finance: Household Finance Mortgages Car and student loans Credit cards Mostly through banks 9
Cash Flows in a Financial System 10 Depositors Investors Mortgage Borrowers Firms Financial Markets Banks Financial Industry
Major Areas of Finance Corporate finance: Capital structure decisions: equity(stock) vs. debt, cash holding etc. Corporate governance (incentive, CEO etc.) Asset pricing: Asset risk premiums (stock, bond, FX etc.) For example: predicting stock returns Derivative pricing/hedging (options, futures etc.) Risk management Portfolio optimization 11
Agenda Time Value of Money Bond and Stock Valuation 12
Time Value of Money What is interest? Just as rent is a landlord’s compensation for the use of his apartment, investors need to be compensated for the use of their money. We call the “rent” for the use of money interest. A dollar today is more than a dollar in the future. 13
Introduction to the Timeline Time Value of Money (TVM) problems involve identifying the payment or receipt of cash over time. A useful tool in the analysis of these problems is the timeline illustrated below. 14 Cashflows 0 1 2 3 4 CF 0 CF 1 CF 2 CF 3 CF 4 5 CF 5 Years or Periods
Compounding of Interest The future value relationship assumes that interest is compounded. (Interest is earned on interest) 15 0 1 2 3 4 CF 0 CF 1 CF 2 CF 3 CF 4 5 CF 5 $100 x 1.05 = $105 $105 x 1.05 = $110.25 $110.25 x 1.05 = $115.76 $115.76 x 1.05 = $121.55 $121.55 x 1.05 = $127.63
X-axis is called investment horizon (or horizon) 16 The Impact of Compound Interest Future Value of $1 $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 0 2 4 6 8 10 12 14 16 18 20 Years Dollars r = 5% r = 10% r = 15%
Example: Manhattan Island Sale