1Foundations of FinanceFall Semester, 2000.Instructor Professor Anthony Lynch, 9-13 Tisch, phone: (212) 998 0350, email: [email protected] ContentThis course is about financial markets and how financial assets (securities) are valued and traded.Most of this course is taught from the viewpoint of the user of a financial market: an investor,investment advisor or someone using the market to hedge risk. Although much of what we coveris relevant to corporate finance (that is, financial decisions within the firm), this area is not theprimary focus of the course. Only rarely will we take the viewpoint of a corporate chief financialofficer dealing with internal decisions. This perspective is covered in great detail in CorporateFinance, a separate subsequent course.GradingYour grade will be based on a midterm exam and a final exam. The midterm exam will be worth40% and cover the first half of the course. The final will be worth 60% and cover the entire course.However, if your grade on the final is better than your midterm grade, the final will count for theentire 100%. The date for the midterm exam will be set in the first two weeks of class. Please keepthis date free. No makeup exam for the midterm will be given; makeup exams for the final may begiven only during the second week in January. Both exams will be closed book except as follows:one 8.5" x 11" sheet with anything written on it can be taken into the midterm and two 8.5" x 11"sheets can be taken into the final. Be warned! If you are found with more than the allowed surfacearea of pages, all of your pages will be immediately confiscated. The curve for this course is the one established by the Finance Department for the introductorycourse: A (20%-25%); B (55%-65%); C (10%-15%); D, F (remainder).Problem SetsProblem sets will be assigned throughout the semester, and solutions will be distributed. To assistthe learning process, due dates will be attached to each problem set. However, your grade does notdepend on your completion of the problem sets and it is not a requirement of the course that youhand them in. At the same time, you are strongly encouraged to attempt the problem set questions.These questions are designed to reinforce concepts learnt in class. Finance involves applying theoryto solve problems and the only way to learn how to do this is by solving problems. Becausecompletion of the problem sets is so useful, I will look over any solution handed in by the due dateand provide you with feedback.TextbooksRequiredBodie, Kane and Marcus, Investments, Fourth Edition, Irwin (BKM).Ross, Westerfield and Jordon, Fundamentals of Corporate Finance, Second Edition, Chapter5, Irwin (RWJ).2OptionalElton and Gruber, Modern Portfolio Theory and Investment Analysis, Fifth Edition, JohnWiley and Sons.Solutions Manual, BKM (SM).Course OrientationBy its very nature, finance is mathematical and theory based. However, most of the theory coveredin this course has immediate practical applications and implications. These will be emphasized asmuch as possible especially before introducing the theory so as to motivate why its being taught.Concepts will wherever possible be illustrated using real data that has been obtained from the WallStreet Journal or some other data service. Every effort will be made to highlight how the theory andconcepts taught in this course would be used by an investor to make real decisions.MiscellaneaSupplementary Material: Lecture notes and problem sets will be distributed in class and arean integral part of the course. These will also be available on my website:http://www.stern.nyu.edu/~alynch/ Reading of the Wall Street Journal or the financial sections of the New York Times is alsoencouraged.Class Attendance: You are responsible for knowing what occurs in class which may includematerial not covered in the readings, modifications to the syllabus and announcementsconcerning exams.Calculator: To solve financial problems, you will need a financial calculator. In additionto the standard operations (+,-,×,÷), it should be able to compute ex and ln(x) (the exponentialand natural log functions) and should be able to compute present and future values of simplesums and annuities. An ability to compute internal rates of return is sometimes useful butis not required. Suitable calculators include the Hewlett-Packard 10B, 14B and 12C, theTexas Instruments BA II Plus and the Sharp EL 733A. Cheating: If evidence of cheating comes to my attention by any means, I will prosecute tothe extent permitted under faculty guidelines.Use of E-mail: I will often use E-mail to communicate with you, so you should try and checkyour E-mail regularly.Discussion Board: I plan to set up a discussion board for this course using Blackboardsoftware. Further details will follow. Where to go for helpThe availability of the TAs for this course will be announced in class. My office hours will beannounced in class.3Organization of the CourseNumber of Sessions Topic Reading0.5 Overview BKM Ch 1, skim Ch 2 and 42 Time Value of Money RWJ Ch 51 Equities: Characteristics and Markets BKM Ch 3.2-3.5, 3.81.5 Stock Positions and Portfolio Return BKM Ch 3.6-3.7 and 5.24 Portfolio Management BKM - Characterizing the return distribution Ch 4.2; A1: 893-898, A2, A3 - Asset allocation between one risky Ch 6, 7 (partic.7.3)and one riskless asset - Diversification with two risky assets Ch 8.1-8.3 - Diversification with many risky assets Ch 8.4-8.52 Capital Asset Pricing Model (CAPM) BKM Ch 9.1, 10.1 and 10.21.5 Intertemporal CAPM: a Multifactor Model BKM Ch 10.4 and 27.21.5 Asset Pricing Models and Market Efficiency BKM Ch 13.1-13.3, 12.1-12.21 Valuation Models BKM Ch 18 (not 18.6)1 Midterm Exam1 Fixed Income Markets BKM Ch 2.1-2.2 and 14.1-14.43.5 Bond Pricing and No-arbitrage BKM Ch 151 Bond Portfolio Management BKM Ch 16.1-16.22 Derivatives: Definitions and Payoffs BKM Ch 20.1-20.4, 22.1-22.32 Options: Valuation BKM Ch 21 (not 21.3)1.5 Futures and Forward Contracts: Valuation BKM Ch 22.4, 23 (not 23.2