Lecture 1 Financial Markets Role: to provide mechanisms for supply of funds to interact with users of funds Households: Suppliers of funds Corporations & Government: Users of funds *Recent Problems Households have been users Rest of world are suppliers Pr
FIN 3080
Michael Ferguson
What is Finance?
Key Concepts and Skills
Understand the how finance relates to economics and the
specific kinds of questions finance helps you answer
Know the role of the financial manager
Understand the goal of the firm
Be famil
FIN 3080
Michael Ferguson
Annuities and Perpetuities
Key Concepts and Skills
Be able to compute the future value of multiple cash flows
Be able to compute the present value of multiple cash flows
2
Annuities and Perpetuities Defined
An annuity is a finite
FIN 3080
Michael Ferguson
Stock Indexes
Key Concepts and Skills
Understand the uses of market indexes
Understand how popular indexes are constructed
Understand the important differences between these
methodologies
Be familiar with the history of the Dow J
FIN3080 Fall 2014
Formulas for Exam 1
Annual Percentage Rate
APR
r
m
m
Note: r = nominal rate and m = # of compounding periods per year
Effective Annual Rate
EAR
r
1
m
m
1
Note: r = nominal rate and m = # of compounding periods per year
Present Value
FIN3080 Fall 2014
Formulas for Second Exam
Value of a Bond and Yield-to-Maturity
T
P
t 1
Coupon
Face Value
t
1 YTM 1 YTM T
Current Yield
Current Yield = (Annual Coupon)/(Price)
Fisher Equation
(
)
(
)(
) where R is nominal rate; r is real rate; i is infla
FIN 3080
Michael Ferguson
Market Efficiency I:
Textbook Definitions
Key Concepts and Skills
Understand the different forms of the Efficient Markets
Hypothesis (EMH)
Understand the implications of the EMH for market prices
2
Technical Analysis
Technical an
FIN 3080
Michael Ferguson
Calculating Risk
and Expected Return
Key Concepts and Skills
Be familiar with how probability distributions are used in
forecasting
Know how to calculate expected returns for both individual
assets and portfolios
Know how to calc
FIN 3080
Michael Ferguson
Rate of Return Basics
Key Concepts and Skills
Be able to compute percentage returns
Be able to compute the mean and standard deviation of
historical returns
Be able to compute arithmetic and geometric averages
Be familiar with di
FIN 3080
Michael Ferguson
The Historical Record
Key Concepts and Skills
Be familiar with the historical returns on various types of
investments
Be familiar with the historical risks of various types of
investments
Understand how the recent U.S. experience
FIN 3080
Michael Ferguson
What is Finance?
Key Concepts and Skills
Understand the how finance relates to economics and the
specific kinds of questions finance helps you answer
Know the role of the financial manager
Understand the goal of the firm
Be famil
FIN 3080
Michael Ferguson
Overview of Financial Markets,
Agency Problems, and Incentives
Key Concepts and Skills
Understand how financial markets fit into the broader economy
Know the difference between primary and secondary markets
Know the important typ
FIN 3080
Michael Ferguson
Overview of Working with
Financial Statements
Key Concepts and Skills
Know the two important accounting identities: the balance sheet
identity and the cash flow identity.
Be able to identify sources and uses of cash
Be familiar w
Optimization
QA2082
Michael Magazine
Something different
Optimization refers to finding the best solution to a problem. It
relates to prescriptive analytics. Problems are described by three
things:
1. Objective functioncost, profit, reliability, ecstasy,.
FIN 3080
Michael Ferguson
Beta and
the Security Market Line
Key Concepts and Skills
Understand the Systematic Risk principle
Understand the Risk-Return tradeoff
Understand the Security Market Line
Be able to use the Capital Asset Pricing Model (CAPM)
Sys
FIN 3080
Michael Ferguson
Mortgages
Key Concepts and Skills
Be able to compute mortgage payments
Be able to compute mortgage balances and be able to
construct an amortization table
Be familiar with adjustable rate mortgages and be able to
compute the new
FIN 3080
Michael Ferguson
Saving for a Goal
Key Concepts and Skills
Be able to determine the value of a future obligation (e.g.,
college tuition or retirement income)
Be able to determine how much money you need to save to
meet a future obligation
Be able
Lecture 2
Stock Indexes:
Index: tracking portfolio of securities artificial #; mirrors stock prices
(goes up and down with stock prices)
Use of Index: Benchmarking:
Track average returns
Compare performance of managers
Base for derivatives contracts
Fa
Finance Lecture 3
Annuity: a finite series of equal payments that occur at regular intervals
If the first payment occurs at the end of the period, this is an ordinary annuity
o Example: home loan
If the first payment occurs at the beginning of the perio
Finance Lecture 4
Multiple Periods- more than one compound per calendar year
The Rule: suppose r is the annual rate of interest and t is the number of years; then compounding
m times per year simply changes formulas like this
Periodic interest rate is r/
Finance Lecture 5
Federal Housing Administration:
Established in 1934,
Created the modern structure for home mortgage loans
Permitting equal monthly payments over an extended period of time, up to 30 years
Prior to FHA, banks would only loan for 5-15
Finance Lecture 6
Saving For a Goal (College or Retirement)
Saving Problems: The Big Idea
Many common problems share the same structure
These problems all involve saving/investing money for a fixed period of time and then
withdrawing the money during the
Finance-Lecture 7
Credit Cards, Car Loans
Suppose you owe $5,000 on a credit card with an APR of 18% that requires monthly payments.
This is a monthly rate of 1.5%.
If the monthly minimum payments is $200, how long will it take you to pay off this
balan
Lecture 8-Bond Valuation
Bond indenture is a contract between the company and the bondholders and includes:
The basic terms of the bond
The total amount of bonds issued
A description of the property used as security, if applicable
Sinking fund provisi
Finance Lecture 9-Stock Valuation
Cash Flows for Stockholders
If you buy a share of stock, you can receive cash in two ways
o The company pays dividends
o You sell your shares, either to another investor in the market or back to the
company
As with bond
Finance Lecture 10- NPV
Net Present Value
The difference between the market value of a project and its cost
How much value is created from undertaking an investment?
o The first step is to estimate the expected future cash flows.
o The second step is to
Chapter 1 Outline
Corporate Finance and the Financial Manager
The Financial Manager
In charge of making business decisions and represents the owners interests
In charge of answering these three questions
o What long-term investments should you take on?
Lecture 11-Captial Investment Decisions
Relevant Cash Flows
The cash flows that should be included in a capital budgeting analysis are those that will
only occur (or not occur) if the project is accepted
These cash flows are called incremental cash flow
Chapter 5- Time Value of Money
Future Value and Compounding
Future Value:
amount an investment is worth after one or more periods
cash value of an investment at some time in the future
Compounding
process of accumulating interest on an investment over tim
FIN 3080
Michael Ferguson
Multiple Compounding Periods,
APRs, and EARs
Key Concepts and Skills
Be able to compute the future or present value when interest is
paid or charge multiple times per year
Be able to compute the Effective Annual (EAR) of interest