MIT Sloan School of ManagementJiang Wang 15.401E52-456 Sections C, D253-2632 ([email protected]) Fall 200715.401 Course SyllabusFinance Theory I(Current Draft: August 31, 2007.)Course DescriptionThis course covers modern finance theory and practice. The topics of the course include: (1) intro-duction to finance; (2) valuation of financial and real assets; (3) portfolio theory and asset pricingmodels; and (4) introduction to derivative securities. 15.401 is a prerequisite for all finance electives.Sections A, B, C and D of 15.401 are for first-year Sloan MBA students and cover the same material.All assignments and exams are the same. Lecture notes differ.Course MaterialsREQUIRED:• Bodie, Kane and Marcus, Investments (6th edition), McGraw Hill. (BKM)• Brealey, Myers and Allen, Principles of Corporate Finance (8th edition), McGraw Hill. (BMA)• 15.401 (Sections A-D) Course Reading Packet, MIT Copy Technology Center (E52-045).• Wang, 15.401 Lecture Notes (Fall 2007). Posted on http://sloanspace.mit.edu. Also avail-able at MIT Copy Technology Center (E52-045).RECOMMENDED:• The Wall Street Journal.Course Requirements• Regular class sessions are on Mondays and Wednesdays in E51-335 from 13:00–14:30 (SectionC) and 14:30-16:00 (Section D), respectively.• Assignments include 7 problem sets and 2 case write-ups.– Problem sets and the Acid Rain case write-up should be done individually.– The Rensselaer Advisors case write-up is done in groups (Type 3).– Each assignment must be handed in at the assigned time and location.– Late assignments are not accepted.• There is a midterm and a final exam. The exams are closed book; one 8.5”×11” sheet of notes(two-sided) is allowed for the midterm and two 8.5”×11” sheets of notes for the final. The finalexam is comprehensive.1• The course grade is determined according to the following weighting:22% midterm45% final exam21% problem sets6% Fixed income case write-up (group project)6% Acid Rain case write-up.• Problem sets cover basics and can be skipped for those who are already familiar with thematerial. In this case, the extra weight is given to the midterm (for problem sets 1-3) or to thefinal exam (for problem sets 4-7).Office HoursMonday 16:00 – 17:30, and by appointment.TA RecitationsWeekly recitations on Fridays (unless announced otherwise). See course web site on SloanSpace fortime and location.SloanspaceCourse information (syllabus, lecture notes, problem sets and solutions, recitation schedule, TA officehours, announcements, additional course material, etc.)Teaching Assistants• Kevin Chu, [email protected]• Mads Faurholt-Lorgensen, [email protected]• Konrad Haunit, [email protected]• Weiyang Qiu, [email protected] Assistant• Sarah Grosvenor, E52-450, 253-9745 ([email protected]).Professional Standards• MIT Sloan Professional Standards. Posted on SloanSpace 15.401 course website.2Course Outline(Schedule of topics and assignments is subject to revision.)Part A. IntroductionSept. 5, 10 Introduction to FinanceFinancial decisions. Approaches to valuation of financial and realassets. Roles of financial markets. Objectives of financial managers.Reading: BKM Chapter 1, 2, 3. BMA Chapter 1, 2.Sept. 12 Present Value (PV)Present value. Mechanics of PV calculations. Compound interest.Reading: BMA Chapter 3.TA Recitation: Friday, September 14.Assignment: Problem Set 1 due Monday, September 17.Part B. ValuationSept. 17, 19, 26 Fixed-Income SecuritiesTerm structure of interest rates. Forward interest rates. Interest raterisk. Inflation risk. Credit risk.Reading: BKM Chapter 14, 15, 16. BMA Chapter 3, 23, 24. SalomonBrothers, “Understanding Duration and Volatility” (15.401 CoursePacket).TA Review Sessions: Friday, September 21 (part 1) and Friday, September 28 (part 2).Assignment: Problem Set 2 due Wednesday, September 26.Rensselaer Advisors case due Monday, October 1.Oct. 1, 3 Common StocksDividend Discount Model (DDM). EPS. P/E ratio. PVGO.Reading: BKM Chapter 18, 19. BMA Chapter 4.TA Recitation: Friday, October 5.Assignment: Problem Set 3 due Thursday, October 11.Oct. 10, 15, 17 Capital InvestmentsCapital budgeting criteria. Cash-flow calculations. ProjectInteraction.Reading: BMA Chapter 5, 6.TA Recitation: Friday, October 12.Assignment: Acid Rain Case due Monday, October 17.3Part C. Return and RiskOct. 29 Introduction to Return and RiskMeasuring risk. Historic asset returns. Random walks.Reading: BKM Chapter 5.2-5.4. BMA Chapter 7.1.Oct. 29 Midterm Review (Time & Location: TBA)Oct. 31 Midterm Exam (in class)Nov. 5, 7 Portfolio ChoiceDiversification. Systematic risk and non-systematic risk. Portfoliotheory. Efficient risk-return trade-off.Reading: BKM Chapter 6.2, 7, 8. BMA Chapter 7, 8.1.TA Recitation: Friday, November 9.Assignment: Problem Set 4 due Wednesday, November 14.Nov. 14, 19 Capital Asset Pricing Model (CAPM)CAPM. Measuring betas. Applications of CAPM. Empirical evi-dence on CAPM. Extensions.Reading: BKM Chapter 9. BMA Chapter 8, 9.1, 9.3.TA Recitation: Monday, November 26.Assignment: Problem Set 5 due Wednesday, November 28.Nov. 21 Efficient Market HypothesisEfficient Market Hypothesis (EMH). Tests of EMH. Implications ofEMH.Reading: BKM Chapter 5. BMA Chapter 13.Part D. Introduction to DerivativesNov. 26, 28 Forwards and FuturesForward and futures contracts. Forward and futures prices. Hedgingwith forwards and futures.Reading: BKM Chapter 22, 23. BMA Chapter 26.TA Recitation: Friday, November 30.Assignment: Problem Set 6 due Monday, December 3.4Dec. 3, 5, 10 OptionsOptions and their properties. Valuation of options: Binomial modeland Black-Scholes formula.Reading: BKM Chapter 20, 21. BMA Chapter 20.TA Review Sessions: Friday, December 8.Assignment: Problem Set 7 due Monday, December 10.Dec. 12 Corporate Applications of OptionsOptions in real investments.Reading: BMA Chapter 21.Dec. 14 Final Review Session (Time & Location: TBA)Dec. 18 Final