Chapter 1: Why Study Financial Markets and Institutions?
Why Study Financial Markets?
Financial markets are markets in which funds are transferred from people who have excess of
available funds to people who have a

AFM 271 Chapter Notes:
Chapter 10: Risk and Return
10.1 A First Look at Risk and Return:
Read examples
10.2 Common Measures of Risk and Return:
Before making investment, understand the risk and return from investmen

DDM
one year investor
>1 yr
Constant div growth model
P0 = (DIv1 + P1)/(1+rE)
rE = (Div1+P1)/P0 - 1 = div yield + cap gain rate =
n=yrs
P0 = Div1/(1+rE) + Div2/(1+rE)^2+ Pn/(1+rE)^n
P0 = Div1/(rE - g)
rE = Div1/P0 + g
Simple model of growth
change in earn

AFM 271 Notes:
Chapter 12: Estimating the Cost of Capital
12.1: The Equity Cost of Capital:
Cost of capital is best expected return available in market on investments with similar risks
Capital asset pricing model (C

MIDTERM 1 PRACTICE QUESTIONS
- WHY STUDY FINANCIAL MARKETS?
- WHAT DOES THE FINANCIAL MARKET DO?
- DESCRIBE DEBT MARKETS
- WHAT DO HIGH INTEREST RATES DO?
- WHAT IS COMMON IN THE MARKET?
- WHY IS STOCK MARKET AN

MIDTERM 2 PRACTICE QUESTIONS
- WHAT ARE THE COMMON MEASURES OF RISK AND RETURN?
- WHAT IS PROBABILITY DISTRIBUTION?
- WHAT IS THE FORMULA FOR EXPECTED RETURN?
- WHAT IS THE FORMULA FOR VARIANCE?
- WHAT IS THE FOR

TERMS FOR MIDTERM 2
- EQUITY COST OF CAPITAL
- STOCK PRICE
- DIVIDEND YIELD
- CAPITAL GAIN
- CAPITAL GAIN RATE
- TOTAL RETURN
- CONSTANT DIVIDEND GROWTH MODEL
- SHARE REPURCHASE
- TOTAL PAYOUT
- EFFICIENT MARKET

Chapter 13: Competition and Capital Markets
13.1 Competition and Capital Markets
To improve the performance of their portfolios, investors who are holding the market portfolio
will compare the expected return of each sec

Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
11.1
11.2
11.3
The Expected Return of a Portfolio
To find an optimal portfolio, we need a method to define a portfolio and analyze its return
We

Chapter 5: Interest Rates
5.1 Interest Rate Quotes and Adjustments
Interest rates are often stated as an effective annual rate (EAR), which indicates the total
amount of interest that will be earned at the end of

Chapter 4: The Time Value of Money
4.1 The Timeline
Stream of cash flows are series of cash flows lasting several periods
We can represent a stream of cash flows on a timeline (a linear representation of the t

AFM 271 Notes:
Chapter 6: Investment Decision Rules
6.1 NPV and Stand-Alone Projects:
When making an investment, take alternative with highest NPV; choosing this is equivalent to
receiving its NPV in cash today
Consid

Chapter 7: Fundamentals of Capital Budgeting
7.1 Forecasting Earnings
Capital budget lists the projects and investments that a company plans to undertake during the
coming year
To determine this list, firms analyze

AFM 271 Notes:
Chapter 8: Valuing Bonds:
8.1 Bond Cash Flows, Prices and Yields:
Bond Terminology:
Bond is a security sold by governments and corporations to raise money from investors today in exchange for promised

Chapter 9: Valuing Stocks
9.1 The Dividend-Discount Model
The law of one price implies that to value any security, we must determine the expected cash
flows an investor will receive from owning it
There are two

Assumptions:
Revenue Growth Rate (annual)
COGS as a % of Revenue
Selling General & Admin. as a % of Revenu
CCA Rate
Interest Expense as a % of Revenue
3.15%
56.50%
1.46%
37.00%
7.87%
Tax Rate
22.75%
NWC as a % of Revenue
42.00%
CAPEX in every year (2015 o

shares O/S
price per share
book value of equity
total debt
cash
10600000000
36
113000000000
370000000000
13000000000
market cap
market to book ratio (P/B ratio)
book debt-equity ratio
market debt-equity ratio
enterprise value
1.2890995261
interest rate
ye

School
of
Accounting&
Accounting&
Finance
Topic 2:
Overview of Security Types
School
of
Accounting&
Finance
Topic Learning Objective
AT this end of this topic students should
be able to:
Describe and differentiate between the
primary types of assets in fi

School
of
Topic 3
Time Value of Money
Accounting&
Accounting&
Finance
School
of
Accounting&
Finance
Topic Overview
This topic has four main pieces:
1.
2.
Present value calculation review:
discounting multiple future cash flows
Application of annuity and p

School
of
Topic 4
Investment Decision
Rules
Accounting&
Finance
School
of
Topic Overview
I.
Net Present Value
II.
Payback Rule
III.
Profitability Index
IV.
Internal Rate of Return
V.
Problems with IRR
2
Accounting&
Finance
School
of
Accounting&
Finance
Le

School
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Topic 6
Bond Valuation
Accounting&
Finance
School
of
Topic 3 Roadmap
Bond Basics
I.
Slides 3-9
Bond Valuation
II.
Slides 10-16
Interest Rate Risk and Duration
III.
Slides 17-23
2
Accounting&
Finance
School
of
Accounting&
Finance
Topic Learning O

School
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Topic 7
Stock Valuation
Accounting&
Finance
School
of
Accounting&
Finance
Topic Outline
1.
2.
3.
The dividend discount model
Total payout and free cash flow valuation
models
Valuation based on comparable firms
2
School
of
Accounting&
Finance
Lea

School
of
Accounting&
Accounting&
Finance
Topic 8:
Measuring Risk and Return
School
of
Accounting&
Finance
Topic Overview
1.
2.
3.
Measuring historical returns and risk
Calculating portfolio risk and return
measures
Correlation and its influence on portfo

School
of
Topic 9
Portfolio Analysis
Part I
Accounting&
Accounting&
Finance
School
of
Accounting&
Finance
Topic 9 Overview
I.
Capital Allocation Line (CAL)
II.
Risk Tolerance and Utility Optimization
III.
Capital Market Line (CML) and Portfolio
Optimizati

Chapter 1: Overview of the Financial System
- Financial markets (bond and stock markets) and financial intermediaries (banks, insurance companies,
pension funds) help flow funds from investors to businesses (those with surplus of funds to those with
short

Chapter 8: Valuing Bonds
-bond indenture: terms of the bond are described; amounts and dates of all payments to be made
maturity date: final repayment date
term: the time remaining until the repayment date
coupons: promised interest payments of the bond

School
of
Accounting&
Accounting&
Finance
Topic 1:
Overview of the Financial
System
School
of
Accounting&
Finance
Financial Markets
Function to channel funds from the people
who have saved surplus funds to people
with a shortage of funds.
Allow people who

School
of
Topic 2:
Financial Markets and
Buying and Selling
Securities
Part I
Accounting&
Accounting&
Finance
School
of
Accounting&
Finance
Overview of Security Types
Focusing on capital transfer between
investors and firms or governments,
securities can