Studiegids

nl en

Foundations of Finance

Vak
2014-2015

Tag(s)

[BSc], GED, ID, PSc, Ec

Admission Requirements

A similarly-tagged 100- or 200-level course, ideally Principles of Economics or similar.

Description

Finance impacts virtually every area of one’s personal and professional activity today, and as such has a natural place in a liberal arts education. This course will introduce students to the foundations of modern finance. Put simply, finance is about decision-making where money is involved. When the monetary costs and benefits of a given course of action are known with certainty and coincide in time, making a decision is easy. When, on the other hand, money flows are risky and scattered over time, as is often the case in situations faced both by individuals and institutions, a specialized analytical framework is called for. As we develop and apply this framework, there will be a good deal of mathematics and computation. However, intuition behind the formulas will always be discussed, and we will take the time to talk about “the big picture”, focusing as much as possible on ideas rather than on numbers. In parallel with developing the analytical tools, we will be discussing current events in the world of finance as they relate to the course content. The course will end with student presentations and class discussions.

Course Aims

The coverage and the objectives of the course are similar to those of introductory finance courses at business schools and universities around the world (although in this course, whenever appropriate, we will seek to emphasise the “why” rather than the “how”). As such, the course will introduce many of the central ideas in finance: cost of capital; present value; investment risk and return and their interconnection; investor decision-making; market efficiency. Students will learn to apply these ideas to determine whether a project creates value, assess risks and returns of investments, select investment portfolios, estimate and interpret the relationship between risk and return, and discuss the efficiency of financial markets and its implications. Additionally, the course will give students the tools to understand and critically interpret technical articles in the financial press, and will furnish them with a foundation for more advanced study of finance.

Course Learning Outcomes

After completing the course, the student should be able to:

  • Understand the keep principles of finance and have a balanced view about the role of the financial markets.

  • Calculate and interpret rates of return and risk measures, when evaluating investment opportunities such as stocks and portfolios assets

  • Evaluate investment projects using Discounted Cash Flow valuation and be able to discuss the strengths and weaknesses of different metrics for capital budgeting.

  • Discuss the principles of optimal portfolio construction.

  • Demonstrate an understanding of the concept of capital market equilibrium.

  • Demonstrate an understanding of the concept of market efficiency.

Mode of Instruction

Every week there will be two times interactive lectures of two hours each in order to comment on the key concepts exercises and reading material of the week. In addition, relevant news and topics will also be discussed during class.

The students are expected:

  • To prepare for class by reading the assigned materials and doing the weekly exercises.

  • To participate actively in classes

  • To work closely in teams (up to 4 people) both on their presentation and report .

Assessment

The grade for in-class participation (15%) will reflect the student’s participation (minimum 12 out of the 14 meetings) and contribution to class discussion throughout the course: thoughtfully relating course readings to news events, asking and answering pertinent questions, and overall engagement during class.

There will be five weekly homework assignments (30%), each representing 6% of the overall course grade. You may work on numerical problems with other students, but if you do so, you must indicate who you have worked with. You must also be ready to discuss your work during class.

Each student will be required to prepare a report and give a presentation (30%) as part of a team (max. 4 members), during the final two sessions of the course. The presentation will be based on one of the chapters in the book ”The Ascent of Money”: Banking, bond, stock market, insurance, real estate market and international finance. Based on thorough reading of the chapter and in-depth research on the relevant market, the teams should prepare a presentation of 15 minutes and a 5-10 page report that:

  • Provide a summary of the origin, crucial developments/innovations and social role of the chosen market

  • Link the chosen market to the course, individual finance or the financial industry as a whole.

  • Point out the priorities for the sustainability of these markets.

  • Substantiate your claims with facts and references.

The 2-hour final sit-in exam (25%) will take place in Week 8. Lecture notes and printed materials will be allowed, and a calculator is recommended (but no computers are allowed). The exam will consist of both numerical and essay questions.

Literature

  • Ivo Welch (2013). Corporate Finance. 3rd edition.
    Free online version: http://book.ivo-welch.info/ed3/toc.html
    Or buy directly buy the book from http://book.ivo-welch.info/ed3/ for $60. Please take into account of extra shipping cost and time.

  • Niall Ferguson (2009). The Ascent of Money. Penguin Books.
    This book also has an in-depth companying documentary available on YouTube

Recommended:

  • Robert Shiller (2005). Irrational Exuberance. Princeton University Press

  • Robert Shiller (2013). Finance and a good Society. Princeton University Press

In addition, students are encouraged to read the financial press, such as The Financial Times, The Wall Street Journal, Bloomberg as well as the academic articles on www.ssrn.com

Contact Information

J.Zhao@rsm.nl