ECON S-1452
Money, Financial Institutions, and Markets
Professor: Bruce Watson
Harvard University
Summer, 2022
bwatson@fas.harvard.edu
Class Time: Mondays and Wednesdays, 6:30 – 9:30
Note: This course will be delivered via web conference on the Zoom platform. All web conference
lectures will be recorded, and will be available on the course Canvas site throughout the semester.
Students may thus view the lectures whenever it is convenient, as many times as they wish.
Teaching Assistant:
Web Conference Sections:
Hashim Zaman
Tuesdays 7:30 – 9:30 PM
Fridays 11:00 AM – 1:00 PM
SYLLABUS
This course presents a moderately advanced overview of concepts and techniques in the fields of
finance, money, and banking. It examines the agents, instruments, and institutions that make up the
financial system of the modern economy, such as bonds, the stock market, derivatives, and the money
market, including the role of banks in deposit and credit creation.
The course is divided into two halves. The first five lectures are devoted to selected topics in finance
and financial markets. Standard concepts and tools of financial analysis are covered, including the
risk-return tradeoff (Sharpe ratio), the capital asset pricing model (CAPM), option pricing theory, the
efficient market hypothesis (EMH) and its alternatives, security analysis, and equity valuation.
The second half of the course begins with a lecture on one of the largest and most important financial
markets—bonds. A related topic, and the subject of the subsequent lecture, is the term structure of
interest rates, captured with a graphical device known as the yield curve.
Money is the most basic financial asset, and a lecture will be devoted to money and banking, including
the structure and function of the US central bank, the Federal Reserve.
Financial markets don’t exist in isolation from the rest of the economy. Hence, in analyzing fixed
income securities and equities, it is important to examine the macroeconomic factors which influence
both the stock and bond markets. These factors can be much more significant than elements which
relate only to particular companies or even industries. Likewise, monetary and fiscal policies can both
have a tremendous impact on markets. All of these topics will be explored in detail.
Lastly, the course looks at the international dimension of finance: Foreign exchange markets, global
equities markets, and the opportunities and risks that arise from global operations.
Publishing or Distributing Course Materials
Students may not post, publish, sell, or otherwise publicly distribute course materials without the
written permission of the course instructor. Such materials include, but are not limited to, the
following: lecture notes, lecture slides, video, or audio recordings, assignments, problem sets,
examinations, other students’ work, and answer keys. Students who sell, post, publish, or distribute
course materials without written permission, whether for the purposes of soliciting answers or
otherwise, may be subject to disciplinary action, up to and including requirement to withdraw from the
Summer School. Further, students may not make video or audio recordings of class sessions for their
own use without written permission of the instructor.
Academic Honesty
Harvard Summer School takes matters of academic honesty very seriously. While you may
discuss assignments with your classmates and others, make sure that any material you submit is your
own work. Use of old course materials, including problem sets or exams from online sources, is
strictly prohibited unless made available to all students by the instructor.
Examples of unacceptable conduct include plagiarism, copying and pasting answers from the internet,
downloading answers to problem sets or exams from other students or the internet, collaborating on
examinations, etc.
Collaboration on problem sets is allowed, even encouraged, but there will be absolutely no allowance
for any collaboration on exams. Any suspected collaboration during an exam, or consultation via text,
email, or the web, will result in a full report to the Administrative Board of the Summer School, with
subsequent investigation and disciplinary action.
You are responsible for understanding Harvard Summer School policies on academic integrity
(http://www.summer.harvard.edu/policies/student-responsibilities). Not knowing the rules,
misunderstanding the rules, running out of time, or being overwhelmed with multiple demands are not
acceptable excuses.
To support your learning about academic integrity rules, please visit the Resources to Support
Academic Integrity: (http://www.summer.harvard.edu/resources-policies/resources-support-academicintegrity)
where you will find links to the Harvard Guide to Using Sources and two free online 15-minute
tutorials to test your knowledge of academic citation policy. The tutorials are anonymous openlearning tools.
Accessibility
The Summer School is committed to providing an accessible academic community. The Accessibility
Office offers a variety of accommodations and services to students with documented disabilities.
Please visit http://www.summer.harvard.edu/resources-policies/accessibility-services for more
information.
All accommodations need to go through the Accessibility Services Office. Separate arrangements
for students who approach individual instructors with a disability issue cannot be made.
Course Requirements
Exams
There will be two exams for the course, one on the material covered in the first half, and one covering
material from the second half. Both will be multiple choice exams taken on-line using a program
called “Connect,” which is based on the textbook.
The first exam will be available on Connect starting at 6:30 PM (US Eastern Time) on Monday, July
11. Students will have a 24-hour window, from 6:30 PM (US Eastern Time) on Monday, July 11 to
6:30 PM (US Eastern Time) on Tuesday, July 12, in which to complete the exam. The exam is two
hours long, and, once begun, must be taken in one sitting. It cannot be partially finished, then saved,
then completed later.
The first exam will cover all the material presented in lecture from the first lecture on June 22 to the
lecture on July 6.
The second exam will be available on Connect starting at 6:30 PM (US Eastern Time) on Monday,
Aug. 1. Students will have a 24-hour window, from 6:30 PM (US Eastern Time) on Monday, Aug. 1
to 6:30 PM (US Eastern Time) on Tuesday, Aug. 2, in which to complete the exam. The exam is two
hours long, and, once begun, must be taken in one sitting. It cannot be partially finished, then saved,
then completed later.
The second exam will cover all of the material presented in lecture from July 13 to the last lecture on
July 27. Hence, it will not be cumulative, only covering the material from the second half of the
course.
Detailed instructions on both exams will be sent to students well in advance of the exam dates.
Please Note:

It is your responsibility to plan your travel ahead around exam dates. The fact that the exams
will be taken on-line, and the 24-hour window in which you can take them, should afford
enough flexibility for you to work around other professional or personal commitments.

No makeup of the first exam will be offered.

Please see the section below on “Grading” to understand how your semester grade will be
determined if you must miss the first exam for any reason.
Proctorio
In order to assure the integrity of the exams, they will be proctored through software called Proctorio.
The Summer School offers remote proctoring integrated into the course Canvas site, and allows you to
take exams wherever you are most comfortable. There is no need to take the exams in the lecture hall,
and, for distance students, there is no need to hire or pre-schedule an in-person proctor.
Proctorio requires you to use a computer outfitted with an external or built-in webcam, microphone,
and the Google Chrome browser. A stable, reliable internet connection is essential (e.g. hotspots and
VPNs won’t work). More information about setting up your computer and an opportunity to test
Proctorio will be provided long before the scheduled exams.
Problem Sets
Problem sets will be completed on Connect, the same on-line platform on which the first and second
exams will be taken. Full instructions concerning the Connect platform will be provided well before
the first problem set is assigned.
There will be six problem sets assigned during the term. All six problem sets will be available on
Connect. Availability and due dates are listed in the course calendar below, and also in Connect.
Problem sets must be completed on Connect before 11:45 PM Eastern U.S. time, on the date the
problem set is due.
We cannot accept late problem sets for any reason. However, to compensate for this policy, the
lowest two of their six problem set scores will be dropped from each student’s semester grade
calculation. If you cannot get a set done some week, that can just be one of the sets that gets dropped.
Our grading policy is designed with the interests of all students in mind. As a teaching staff, we have
to be fair to those whose submit their problem sets on time, often in spite of difficult situations.
However we drop the lowest two scores to offer flexibility to those who encounter situations beyond
their control, or who just had a bad week.
With so many students in so many different circumstances, we have found the best way to be fair to
everyone is to lay these ground rules out well in advance and follow them without exception.
Graduate Project
(Note: This requirement applies only to students registered for graduate credit)
Students registered for graduate credit must submit three 1 – 2 page papers, written on Canvas,
applying what they have learned in class to a relevant news item that they find in the media—
newspapers, magazines, or on-line.
Due dates for the papers are as follows: June 30, July 14, and July 28.
Grading
Your semester grade will be based on the higher of two weightings:
30% problem set scores
35% first exam
35% second exam
or
30% problem sets
70% second exam
So, if you do poorly on the first exam, or are unable to take it for any reason, your final exam will
automatically be reweighted to be 70% of your semester grade, with the average of your four highest
problem sets constituting the remaining 30%. We will make these calculations automatically for each
student—you don’t have to “opt in” or “opt out” of one or the other weighting. We will make certain
you receive the highest grade to which you are entitled.
Once we have determined which weighting gives you the higher semester score, your grade will be
calculated two ways, and if there’s any difference in the result, we will give you the higher of the two
letter grades which result.

Curve
In the first calculation, semester grades will determined by a curve. The nature of a curve is that your
grade is based on your performance relative to all other students in the class. It does not involve an
“absolute standard,” e.g., 90 – 100 = A, 80 – 90 = B, etc., which you may be used to from high school
or in some other courses. I believe that a curve is ultimately the fairest way to determine grades, since
it does not set some arbitrary absolute standard, but assigns grades based on students’ performance
relative to their peers.
With a curve, your grade is based on your percentile rank in the class, i.e., the percentage of students in
the class who scored below you. If you are in the 60th percentile, for example, that means that 60% of
students had scores equal to or below yours, while 40% of students had scores above yours.
The Curve Used in Assigning Your Letter Grade for the Semester
To determine your semester grade, we will employ the (very generous) curve given below:
Letter Grade
Percentile Rank Range of Letter Grade
A
83rd Percentile – 100th Percentile
A-
63rd Percentile – 83rd Percentile
B+
44th Percentile – 63rd Percentile
B
24th Percentile – 44th Percentile
B-
10th Percentile – 24th Percentile
C+
7th Percentile – 10th Percentile
C
5th Percentile – 7th Percentile
C-
3rd Percentile – 5th Percentile
D
2nd Percentile – 3rd Percentile
E/F
0th Percentile – 2nd Percentile
For example, say your total semester points were 85% of total possible points. If this score put you in
the 60th percentile, you would receive a B+ by the curve.

Absolute Scale
In the second calculation, grades will be determined by the standard curve you may be familiar with
from high school. In this approach, your letter grade is based on your total points as a percentage of
the total possible points for the semester. Here is the scale:
A
93.0%
C+
77.0%
A-
90.0%
C
73.0%
B+
87.0%
C-
70.0%
B
83.0%
D
65.0%
B-
80.0%
E/F
0.0%
So, for example, if your total points for the semester were 85% of the total possible points, you would
get a letter grade of B.
Given that the curve resulted in a grade of B+, while the absolute scale resulted in a grade of B, your
reported semester grade would be a B+.
Note for graduate students: Your semester grade, as calculated above, will be lowered by half a
letter grade for each of the three graduate papers that you do not submit. For example, if you fail to
submit one of the papers, your grade in the example above would be lowered from a B+ to a B.
Readings
The textbook for the course is:
Bodie, Kane and Marcus, Investments, (12th Edition, 2021).
ISBN: 978-1260571158
However, there is no one book that covers all the material that we will. The majority of the reading
reinforces material you'll learn in class, but some of the topics we cover may not appear in any reading.
Conversely, some of the assigned reading is for background, and will not be covered explicitly in class.
You should consider the readings to be most useful as a reference, or as an additional source of review
for material we have presented in class. You will not be responsible-on problem sets or exams-for
material in the readings that we have not covered in class.
So, if you can find an earlier, less expensive edition of the textbook, (including international editions),
that will be fine.
Relevant newspaper and magazine articles may also be placed on the “Readings” page of the course
web site when relevant.
Course Evaluation
Your constructive assessment of this course plays an indispensable role in shaping education at
Harvard. Upon completing the course, please take time to fill out the online course evaluation.
Student Profiles
Every summer, the course enrolls people from an amazing variety of backgrounds and walks of life.
And, the reasons for taking the class are almost as diverse as students’ backgrounds. In order to share
a little of their life stories with their classmates, students are encouraged to submit a few lines about
themselves to the “Student Profiles” discussion board on the course website.
Please note that this is completely voluntary, and also that the only people who will be able to view
what you submit will be your classmates and the teaching staff—nobody else. Just submit a few
lines about your job, background, interests, and/or why you have decided to study finance.
Even if you decide not to submit a profile, you will enjoy reading about some of your fellow students.
COURSE CALENDAR
Wed., June 22
Course Introduction and Overview
Capital Allocation
The Three Levels of Portfolio Selection
Capital Allocation Between a Risky and a Risk-Free Asset
The Capital Allocation Line (CAL)
Risk vs. Return: The Sharpe Ratio
Bodie, Kane and Marcus, Chap. 6
Fri., June 24
Optimal Risky Portfolios
The Role of Diversification
A Portfolio with Two Risky Assets
Portfolio Optimization: The Efficient Frontier
Bodie, Kane and Marcus, Chap. 7
Problem Set 1 Available on the Course Connect Site
Mon., June 27
The Capital Asset Pricing Model (CAPM)
The Beta Coefficient
The Security Market Line (SML)
The Search for Alpha
Bodie, Kane and Marcus, Chap. 9
Wed., June 29
Efficient Markets Hypothesis: Theoretical and Empirical Foundations
Alternatives to EMH: Behavioral Finance
Bodie, Kane and Marcus, Chaps. 11 – 12
Problem Set 1 Due
Problem Set 2 Available on the Course Connect Site
Wed., July 6
Option Markets and Option Valuation
Option Basics: Calls and Puts
Option Pricing Models
Binomial Option Pricing Model
Black-Scholes Option Pricing Model
Bodie, Kane and Marcus, Chaps. 20 – 21
Problem Set 2 Due
Problem Set 3 Available on the Course Connect Site
Fri., July 8
Review Session for the Midterm
Sun., July 10
Problem Set 3 Due
Mon., July 11- First Exam (2 hours, covering all material from June 22 -- July 6, inclusive)
Tues., July 12
Wed., July 13
Fixed Income Securities
Basics of Bond Pricing
Characteristics of Bonds
Managing Bond Portfolios
Duration
Bodie, Kane and Marcus, Section 2.2
Chap. 14
Problem Set 4 Available on the Course Connect Site
Mon., July 18
The Term Structure of Interest Rates
The Yield Curve
Theories of the Term Structure
Bodie, Kane and Marcus, Chap. 15
Wed., July 20
Money: The Most Basic Financial Asset
Banks and the Banking Industry
Structure and Functions of the Federal Reserve
Monetary Aggregates
The Money Multiplier
Conventional and Unconventional Monetary Policy:
The New Role of the Fed, and the New Realities of Banking
Problem Set 4 Due
Problem Set 5 Available on the Course Connect Site
Mon., July 25
Macroeconomic Factors in Security Analysis
Demand and Supply Shocks
Business Cycles
The Role of Monetary and Fiscal Policy
Bodie, Kane and Marcus, Chap. 17
Wed., July 27
Foreign Exchange and International Finance
Global Equities Markets
Exchange Rate Risk and Diversification
Political Risk
Bodie, Kane and Marcus, Chap. 25
Problem Set 5 Due
Problem Set 6 Available on the Course Connect Site
Fri., July 29
Review Session for the Second Exam
Sun., July 31
Problem Set 6 Due
Mon,, Aug. 1 – Second Exam (2 hours, covering all material from July 13 – July 27,
Tues. Aug. 2
inclusive)