Foundations of Finance (B09.2316)
Spring Semester, 1998.
Instructor
Professor Anthony Lynch, 9-13 Tisch, phone: (212) 998 0350.
Course Content
This 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 cover
is relevant to corporate finance (that is, financial decisions within the firm), this area is not the
primary focus of the course. Only rarely will we take the viewpoint of a corporate chief financial
officer dealing with internal decisions. This perspective is covered in great detail in Corporate
Finance, a separate subsequent course.
Prerequisites
The prerequisites for this course are all core courses in accounting, statistics, operations research and
economics. Finance is very mathematical and you will need to utilize material developed in the
prerequisite courses. If you have not taken these courses, it is highly likely that you will have
difficulty in this one.
Grading
Your grade will be based on a midterm exam and a final exam. The midterm exam will be worth
45% and cover the first half of the course. The final will be worth 55% and cover the entire course.
However, if your grade on the final is better than your midterm grade, the final will count for the
entire 100%. The date for the midterm exam will be set in the first two weeks of class. Please keep
this date free. No makeup exam for the midterm will be given; makeup exams for the final may be
given only during the first week in June. 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.
The curve for this course is the one established by the Finance Department for the introductory
course: A (10%-15%); B (40%-65%); C (15%-25%); D, F (remainder).
Problem Sets
Problem sets will be assigned throughout the semester, and solutions will be distributed. You are
strongly encouraged to attempt the problem set questions. These questions are designed to reinforce
concepts learnt in class. Finance involves applying theory to solve problems and the only way to
learn how to do this is by solving problems.
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Textbooks
Required
Bodie, Kane and Marcus, Investments, Third Edition, Irwin (BKM).
Solutions Manual, BKM (SM).
Ross, Westerfield and Jordon, Fundamentals of Corporate Finance, Second Edition, custom
version containing Chapter 5, Irwin (RWJ).
Optional
Elton and Gruber, Modern Portfolio Theory and Investment Analysis, Fifth Edition, John
Wiley and Sons.
Course Orientation
By its very nature, finance is mathematical and theory based. However, most of the theory covered
in this course has immediate practical applications and implications. These will be emphasized as
much 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 Wall
Street Journal or some other data service. Every effort will be made to highlight how the theory and
concepts taught in this course would be used by an investor to make real decisions.
Miscellanea
Supplementary Material: Other readings and notes will be distributed in class and are an
integral part of the course. Reading of the Wall Street Journal or the financial sections of
the New York Times is also encouraged.
Class Attendance: You are responsible for knowing what occurs in class which may include
material not covered in the readings, modifications to the syllabus and announcements
concerning exams.
Calculator: To solve financial problems, you will need a financial calculator. In addition
to the standard operations (+,-,×,÷), it should be able to compute ex and ln(x) (the exponential
and natural log functions) and should be able to compute present and future values of simple
sums and annuities. An ability to compute internal rates of return is sometimes useful but
is not required. Suitable calculators include the Hewlett-Packard 10B, 14B and 12C, the
Texas Instruments BA II Plus and the Sharp EL 733A.
Cheating: If evidence of cheating comes to my attention by any means, I will prosecute to
the extent permitted under faculty guidelines.
Use of E-mail: From time to time, I will use E-mail to communicate with you, so you should
try and check your E-mail regularly.
Where to go for help
The availability of the TAs for this course will be announced in class. My office hours also will be
announced in class.
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Organization of the Course
Number
of Sessions
1
3
1
1
4
2
1
1
1.5
1.5
3
1
2
1.5
1.5
1
Topic
Reading
Overview
BKM Ch 1, skim Ch 2
Time Value of Money
RWJ Ch 5
Equities: Characteristics and Markets
BKM Ch 3.2-3.7
Stock Positions and Portfolio Return
BKM Ch 3.6-3.7 and 4.2
Portfolio Management
BKM
Characterizing the return distribution
Ch 4.2; A2-A8, A19-A34
Asset allocation between one risky
Ch 5, 6 (partic. 6.3)
and one riskless asset
Diversification with two risky assets
Ch 7.1-7.3
Diversification with many risky assets
Ch 7.4-7.5
Capital Asset Pricing Model (CAPM)
BKM Ch 8.1, 9 (not 9.3)
More General Asset Pricing Models
BKM Ch 8.2, 25.2 and 29.2
Midterm Exam
Asset Pricing Models and Market Efficiency BKM Ch 11 and 12.1-12.2
Fixed Income Markets
BKM Ch 2.1-2.2 and 13.1-13.4
Bond Pricing and No-arbitrage
BKM Ch 14
Bond Portfolio Management
BKM Ch 15.1-15.2
Derivatives: Definitions and Payoffs
BKM Ch 19.1-19.4, 21.1-21.3
Options: Valuation
BKM Ch 20 (not 20.3)
Futures and Forward Contracts: Valuation
BKM Ch 21.4, 22 (not 22.5)
Valuation Models
BKM Ch 17 (not 17.6)
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