ACE 443 Intermediate Financial Management Spring 2007 proposed Professor Bruce J Sherrick sherrick uiuc edu Room 306 Mumford Hall 244 2637 Administrative Assistant Melissa Warmbier 304 Mumford Hall 333 0737 Course Objectives The course has several related objectives including i development of improved skills related to modern credit risk assessment and management ii understanding bank and lending institutions objectives and iii understanding the organization of markets supplying financial capital to individuals and small businesses including the general regulatory and oversight environment under which they operate The course is part of the applied financial management curricula both Agricultural Finance and Financial Planning and Management and seeks to develop skills critical in the lending and financial services industries It is assumed that students enrolling in ACE 443 have had more than one previous course in applied or corporate finance such as ACE 243 ACE 340 FIN 254 FIN 300 etc and a course in statistics Some math and calculus concepts are used on occasion during the semester and many of the tools and techniques used require at least modest facility with Excel Assignments and Grades Specific assignments include three exams weekly reading writing assignments non exam weeks two extensive credit risk evaluation exercises and for graduate students a presentation of a reading report in class The overall course grade is based on the following weights Exams 75 assignments attendance participation 25 The assignments will be distributed in class Graduate students will have an option to conduct research related to their thesis in lieu of the class assignments if approved in advance by the instructor Reading Report Option Grad Students Only Graduate students wishing to earn an additional hour of credit may do so with the presentation of a Reading Research reports supporting a topic covered in class The presentation must be made available for posting on the class website at least on class prior to presentation and becomes part of the class record and material eligible for testing The in class presentation can be conducted according to the format provided below although other formats may apply in some cases The presentations are given orally in class with supporting handouts during a 15 25 minute period Allow a few minutes for questions or discussion at the end of the presentation It is expected that you will use Powerpoint or similar presentation aids to make a professional quality presentation A general outline to follow could include 1 2 3 4 5 6 7 Nature of the subject or problem The article s objective The conceptual base The analytical methods The sources and quality of data The findings and conclusions Your evaluation Additionally you should identify and understand related literature and reflect relevant linkages or different viewpoints in your report Class website The class website url http www ace uiuc edu classes ACE443 not live except during course is used primarily as a location to store materials including the loan level datasets used in the course Given past experience I have found that it works best to only post class notes presentations and handouts 1 to 2 days after they have been used in class and class assignments tools and model templates a few days before they are first used Course Organization The class meets two times per week for 90 minutes each meeting The first meeting is typically used as a lecture session to introduce a subject and examine theoretical materials e g journal articles and review relevant reference materials The second meeting typically involves a discussion approach working through a specific application or approach used in practice i e credit scoring model from a bank with emphasis on the difficulties encountered in application In addition there are two somewhat more extensive projects conducted during the semester the first involving a loan level data set from an actual lender 5 loan types approximately 100 000 loans and 2 000 cases of nonperformance and the second involving the use of credit bureau information and the construction and use of credit scores the students own data and a case file on a hypothetical borrower Each of these projects is used to enhance and refine the appreciation of the difficulties of evaluating ex ante credit risk and the complementing issues related to loan pricing and profitability for both borrowers and lenders Each involves one to two additional class sessions and a written project and problem set Topics The topics and their general order of coverage by week are given below Each topic is allocated approximately 1 week The remaining weeks are allocated to exams project discussions and reading assignment presentations 1 Financial terms markets and scope of coverage e g article 9 security interests and some exposure to financial market monitoring materials e g Fed Monetary Trends publications 2 Financial contracts loan covenants financial management of borrowed capital 3 Risk rating practices by financial and insurance institutions and why insurance markets work so well 4 Credit risk concepts loan data distributed at this point 5 Traditional credit evaluation models and scoring algorithms simple logit with experience data and applications to your data Exam I at this point 6 Default Mode measures credit migration VaRs and transition matrix approaches 7 CreditMetrics and other popular commercial approaches Project 1 due 8 Credit risk and the Capital Market Line Credit Bureau assignment and case data distributed 9 Seasoning of credit risk and portfolio level analysis of loan exposure in correlated units 10 Credit Bureau Information credit scoring use in consumer and business lending Exam II at this point 11 Leverage ROE vs ROA and the incentive alignment between borrowers and lenders 12 PD LGD EAD and other constructs popularized and required by Basell II Modern Regulatory environment and what it means for lenders Project 2 due Final Exam