More detailed syllabus
Topic: Intro/basics of the financial world
Synopsis: In the first 2 lectures, we'll introduce a family of topics that we'll develop further all term. We'll also lay out a general perspective: Financial markets are vital to growth and welfare. Absent a wide array of public and private institutions and practices, financial markets work hideously badly. Why is this? What are key financial markets and institutions that have grown up to overcome the problems in financial markets? How do they work? How do they affect the performance of the economy? Why do they regularly fail, sometimes causing disastrous financial crises? These are questions we'll try to shed some light on.
Key terms: Some paired terms: [asset, liability], [debt, equity], [primary market, secondary market], [money market, capital market], [bank, investment bank, central bank]. Some information problems: asymmetric information, moral hazard, adverse selection.
Read: ch. 1,2,7. (for first two lectures)This reading is for the first 2 lectures
Summary: ch. 1:1-5
Questions: ch. 1: 1,2,4,7,8
Topic: continue from last time, and describe some broad facts about debt.
Synopsis: See Jan. 30.
Read: ch. 1,2,7 (for first 2 lectures)
Summary: ch. 7: 1,3,4,6,7.
Questions: : ch. 7: 3,4,5,7,8,12,18
Topic: Stock market, 1
Synopsis: In the next three lectures, we'll discuss the stock market---the secondary market for publicly traded equities. This lecture will focus on what stocks and stock indices are and broad facts about the behavior of stock indices worldwide. The next lecture will focus on models for assessing a stock's value, and the third lecture will discuss how secondary markets work (in general and in the case of equities).
Key terms: primary market, secondary market, stock index, total return index, Dow, S&P500, FTSE, DAX, Nikkei, Hang Seng, common stock, preferred stock,
Read: ch. 13, review ch. 2, p21-22, on global markets
Topic: Stock market, 2
Synopsis: This lecture presents models of how to assess the value of a stock. It starts with the basics of present value (Ch. 3, p. 37-38) and then present 3 methods for using this concept to assess the value of a stock.
Key terms: present value, generalized dividend model, Gordon growth model, price earnings ratio (PE)
Read: ch. 13 (again), ch.3 p37-38.
Summary: ch.13: 1,2
Questions: ch.13: 1,2,3,4,5
Quantitative probs.: ch. 13:14
Feb. 13: problem set 1 posted
Topic: Stock market, 3
Synopsis: This lecture discusses how secondary markets work. That is, how do market institutions actually connect buyers and sellers and set the price at which they trade. A main lesson is that it is remarkably tricky to match widely dispersed buyers and sellers in a transparent manner that is relatively free from various sorts of scam. We'll go beyond the book, reading 3 short pieces by the SEC.
Key terms: organized exchange, dark pool, ECN, bid, ask, broker, buying on margin, bid price, ask price, types of orders (market, limit, stop)
Other reading: Three short SEC readings: trading basics; Trade execution: What every investor should know; Buying on margin
Read: ch. 13 (again); the three SEC readings are a main focus
Topic: Interest rate basics; valuing securities promising fixed payments.
Synopsis: In discussing valuation of equities, we were pretty hazy in talking about where the discount rates used in our valuation models come from. We are building toward a unified perspective on interest rates and the discount rates used to assess the value of bonds, equities, and all financial instruments. We'll have to take account of three main factors: time horizon, risk characteristics, and liquidity. For two of these, time horizon and risk, there are sophisticated mathematical models. We'll just get a flavor of those. As for liquidity, we'll discuss how this topic remains very important, but very poorly understood. Today we start two lectures on the arithmetic of interest rates and how it is used to value bonds, mortgages, and other fixed income securities.
Key terms: cash flow, coupon bond, coupon rate, current yield, face (par) value, perpetuity (consol), present value, capital gain or loss, annualized interest rate, internal rate of return, real vs. nominal interest rate, yield to maturity
Other reading: Logarithm review, Annualized Rates, Bond Details
Read: ch. 3
Summary: ch.3: 1, 2,3
Questions: ch.3: 1,2
Quantitative probs.: ch.3: 1,2,3,4,8,9,15
Topic: Term structure of interest rates
Synopsis: This lecture takes up the time dimension of interest rates: how are interest rates for different time horizons related? This is known as the theory of the term structure of interest rates and because many financial instruments offer payments at multiple time horizons, the term structure is one of the most important building blocks in finance.
Key terms: liquidity premium, expectations theory of term structure, forward interest rate
Other reading: Bernanke speech on long rates, Yield curve: the movie
Read: ch. 5, only the term structure part
Questions: ch. 5: 4,5,6,7.
Quantitative probs.: 2,6,7.
Feb. 22: problem set 1 due, start of class, 10:30
Topic: term structure continued from last time.
Topic: Review and consolidate
Mar. 1: Midterm 1
Synopsis: In class. If you require accommodations, be sure the TA knows in advance. Remember past midterms are good guide and can be found on the more materials page.
Topic: Commercial banking 1: what role to banks play in the financial system?
Synopsis: How do banks help overcome Shakespeare problems? And explain the basics of running any financial institution, using a bank as our concrete example.
Key terms: bank run, balance sheet, asset, liability, net worth, capital, leverage, solvent, insolvent,equity multiplier, return on assets, return on equity, net interest margin, deposit insurance, loan covenant, collateral
Read: ch. 7 (again, it should mean more to you this time), Ch. 17.
Questions: 1,10,11,12,13,14,15 (Note: many of the questions between 2-9 are a bit daffy in the current strange environment.)
Topic: Commercial banking 2, risk management
Synopsis: The next three lectures focus on a broad family of the related notions including diversification, portfolio theory, and formal risk modelling. We start with key concepts from the standpoint of a commercial bank, then move into more technical (mathy) elements of risk management. xxxx troduce one more technical concept in finance: duration. Duration is basically `effective maturity' of a collection of payments coming at different points in time, and the role of duration in risk is paramount in financial management. We then turn to the basic issues of financial management of a bank, e.g., capital and liquidity management.
Key terms: asset management, capital adequacy management, credit risk, interest rate risk, liability management, liquidity management, off-balance-sheet activities, required reserve ratio, required reserves, reserve requirements, reserves, duration, yield to maturity, interest rate risk, duration gap analysis.
Read: Ch.3. p.51 to end,the part on interest rate risk and duration. Ch. 23
Summary: ch 3: 1,3,4; ch. 23: 1,2
Questions: ch. 3: 2,3, ch. 23: 2,3,6
Quantitative probs.: ch. 3: 11,12; ch. 23: 1,2,12,21
Mar. 11: Last day to drop
Topic: More diversification, portfolio theory, formal risk modelling.
Synopsis: This lecture introduces some more technical aspects of risk management and reviews some basic probability and statistics required to understand these aspects of risk management.
Key terms: expectation, standard deviation, variance, covariance, correlation, idiosyncratic risk, systematic risk, P/E ratio, Gordon growth model, value at risk
Other reading: Probability and stat. notes. [pdf 176k].
Read: Ch. 4, app. 1.
Topic: Cont. from last time. Portfolio theory.
Topic: Spring Break
Topic: Spring Break
Topic: Guest Speaker: Patricia Little, CFO Hershey
Synopsis: Come with questions about what a CFO does, how CFOs interface with the financial system, and/or what kind of people they like to hire
Topic: Guest Speaker: Kevin Heerdt
Synopsis: Kevin has long experience on Wall Street and is currently teaching the `history and future of the hedge fund industry' course here at Hopkins. He'll summarize some of his course as part of our study of investment management.
Apr. 3: Problem set 2 posted
Topic: Bundlers of investment funds
Synopsis: Several decades ago, insurance companies and pensions held bonds, and wealthy individuals held stocks directly. Most households held few financial assets other than bank accounts. That has changed radically as new entities such as mutual funds and ETFs popped up allowing for much easier and cheaper participation in bond and equity markets for a broad range of investors. I'll discuss a group of entities that I call bundlers: entities that bundle funds from many individuals and invest them. Today we'll do a whirlwind tour of bundlers.
Key terms: mutual fund, ETF (exchange traded funde), hedge fund, private equity fund, pension plan (defined benefit, defined contribution), sovereign wealth fund, NAV (net asset value), annuity, ERISA, PBGC, IRA (not the one that may come to mind if you are Irish), fiduciary
Read: Ch. 20, 21
Summary: Ch. 20: 3,4; Ch. 21: 1-8. Ch 21: 1-5, 10-12
Topic: Price determination and efficient markets
Synopsis: We've now discussed stock markets, portfolio theory, and many of the major players that invest funds in stock. Today we pull this all together asking whether there is a `right' price for stocks, if so, whether market prices are generally near the `right' price, and how market forces might achieve this outcome.
Key terms: efficient markets hypothesis, asset pricing anomaly,deep market efficiency, ephemeral market efficiency
Other reading: Malkiel, pp. 59-61, 71--80.
Topic: Guest Speaker, Ross Margolies (JHU trustee, alum, and investment manager)
Synopsis: We have approached the question of price determination and passive vs. active investing a few times, and in this lecture Ross will address the topic head on.
Key terms: passive vs. active portfolio strategy
Other reading: I have emailed three pieces to everyone in the class. These should not be posted or re-circulated.
Topic: Wrap up and summarize (see the consolidated notes for Apr. 5
Apr. 17: Midterm 2
Topic: Derivatives, financial engineering
Synopsis: The progress from `neither a borrower nor a lender be' to `financial risks are packaged so that they flow efficiently from those facing the risk to those most willing to bear them' had been great by, say, 1980. But the idea of derivatives, which had been around in some form for hundreds of years, emerged over the next couple of decades as an infinitely flexible way to `slice and dice' risks so that they could be traded freely. We'll examine this general idea and its implementation in a variety of specific derivative instruments.
Key terms: option (American, European, call, put, in the money, out of the money, strike price, expiration), interest rate swap, credit default swap, futures contract, forward contract, central counterparty, over-the-counter
Read: Ch. 24
Quantitative probs.: 1,3,9,11,24
Apr. 20: Last day to withdraw
Apr. 24: problem set 2 due
Topic: Guest speaker: John Marshall, Goldman Sachs
Topic: Investment banking
Synopsis: Investments banks in the current regulatory environment can play about every role in the financial system. Traditional investment banking services include a vareity of match making services: e.g., helping firms with IPOs, mergers and acquisitions, and playing the role of market maker.
Key terms: due diligence,IPO, market maker, primary market, seasoned issue, underwriting public offering
Read: Ch. 22, everything up to the venture capital part.
Topic: Central banks, who needs 'em? Why are they independent?
Synopsis: Most advanced societies have chosen to form `independent' central banks with a wide range of powers. There is currently a political upheaval going on in many places, and overthrowing conventional wisdom about central banks is part of this upheaval. In this lecture we will discuss these issues from a historical perspective.
Key terms: FOMC, reserve bank president, governor, central bank independence, central bank transparency.
Other reading: Two pieces by your prof.: Why do societies need independent central banks?; and Tangled Web from start of section 3 to end of 3.1.
Topic: Money, Monetary policy basics
Key terms: financial conditions, accommodative (more/less), LSAP, forward guidance, dual mandate central bank, open market operation, Taylor rule, traditional monetarist and keynesian
May 13, 1pm: Review Session
Topic: Where: 603 Wyman
May 17, 2-4pm: 2 hour final
Topic: Where: 202 Shaffer