More detailed syllabus
Topic: Intro/basics of the financial world
Synopsis: In the first 3 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. This reading is for the first 3 lectures
Summary: Ch. 1:1-5
Questions: ch. 1: 1,2,4,7,8
Synopsis: See Jan. 31.
Key terms: questions: : Ch. 7:3,4,5,7,8,12,18
Read: ch. 1,2,7 (for first 3 lectures)
Summary: ch. 7: 1,3,4,6,7.
Topic: Stock market, 1
Synopsis: In the next three lectures, we'll discuss the market for 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.
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
Feb. 14: problem set 1 posted
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
Topic: Stock market, 3
Synopsis: This lecture discusses how secondary markets--for stocks and in general--work. That is, how do market institutions actually connect buyers and sellers and set the price at which they trade. 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 that promise 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 it remains a 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 securities that promise fixed payments.
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. 28: problem set 1 due, start of class, 10:30
Topic: Commercial banking 1
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 (review, it should mean more 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: Guest Speaker: Patricia Little, CFO Hershey
Synopsis: Come with questions about what a CFO does, how CFOs interface with the financial system, and what kind of people they like to hire
Mar. 7: Midterm 1
Synopsis: In class. If you have 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 2
Synopsis: Today and in the next lecture we delve further into risk managment in financial institutions and introduce one more technical concept in finance: duration. Duration is basically `effective maturity' of a collection of payments, 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. 12: Last day to drop
Mar. 14: problem set 2 handed out
Topic: Snow day!?!
Topic: continued from last time (Mar. 9)
Topic: Spring Break
Topic: Spring Break
Topic: diversification, portfolio theory, formal risk modeling
Synopsis: Up to now, we've only touched on the related notions of diversification, portfolio theory, and formal risk modelling. Diversification involves following the adage don't put all your eggs in one basket. Fine, but this leaves many questions: How many baskets? And which eggs go in which basket? We'll provide a way to think about some of the deepest issues in finance. The formal bits of this topic require just a bit of probability and statistics.
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: Finish up probability; portfolio theory; risk managment. Finish up portfolio theory
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 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: 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, allowed 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
Topic: Finish up from last time plus securitization
Synopsis: Securitization played an important role in the crisis and is another example of repackaging financial flows in ways that allows different parties to bear different risks. Further securitization allows a hybrid between arms-length and relationship-based finance: originate the loan in a relationship; fund it by arms length. What could possibly go wrong?
Apr. 13: Midterm 2
Apr. 18: problem set 2 due
Topic: Bundlers of investment funds
Key terms: mutual fund, hedge fund, private equity fund (defined benefit, defined contribution), sovereign wealth fund, pension 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: 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 refer to this group as bundlers: entities that bundle funds from many individuals and invest them. Today we'll do a whirlwind tour of bundlers. Ch. 20: 3,4; Ch. 21: 1-8. Ch 21: 1-5, 10-12
Topic: Guest Speaker: Kevin Heerdt
Synopsis: Kevin will speak about the alternative investments (hedge fund) industry. He has a wealth of knowledge and experience: he was managing director at Moore Capital (1990-2003) and COO at Campbell and Company here in Baltimore (2003-2010). Since then, among other things, he has been heavily involved in micro-credit directed toward revitalizing Baltimore neighborhoods. Come with questions about hedge funds and the investment industry more generally.
Apr. 21: Last day to withdraw
Topic: Political economy and central banks
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
Key terms: financial conditions, accommodative (more/less), LSAP, forward guidance, dual mandate central bank, open market operation
Other reading: Read the CFE blog posts listed on the news page.
Topic: Wrap up monetary policy basics; Some history and federal reserve structure
Key terms: FOMC, voting member of FOMC, Federal Reserve Board, Federal Reserve Bank
Other reading: Section 2 only of Faust, Whom can we trust? [pdf 258k]; Sections 4.1 and 4.2 of Faust and Leeper, The Myth of Normal. [pdf 645k]
Topic: money, monetary policy
Key terms: UIP
Date TBD: Review Session
Topic: Where: TBD
Sat., May 13, 9:00-11:00: 2 hour final
Topic: Where: regular classroom