Introduction to the Theory of Finance
- To summarize the fundamental theoretical aspects of finance relevant to the future study of finance.
- Students understand specific questions the theory addresses.
- Students understand that finance issues are not isolated from each other.
- Students understand time value of money, patterns of financial decision making in increasing complexity of financial environment.
- Students understand which theory is applicable in these circumstances and what are its practical limits.
- Students are able to critically evaluate current research in this field.
- Students know mathematics of finance theory and methodology of financial decisions.
- Students know how and when finance theory can be applied to achieve a desired goal.
- Students are familiar with empirical evidence which support or reject hypothesis and predictions of a theory.
- Topic 1. Introduction and history of the financial schoolPeriods of financial science. The essence of classical and neoclassical theory of finance; The role of individual scientists in the development of financial science; The neoclassical theory of finance; Features of development of financial science in Russia; Russian scientists contribution to the development of financial science
- Topic 2. The financial system, financial markets, the modern theory of financeThe functions of the financial markets. Structure and classification of financial markets (according to the type of financial instruments, according to the method of placement of financial instruments by maturity instruments, according to the method of organization of transactions). The international financial market, eurobonds, euro. International securities market. Financial intermediaries. The role of financial intermediation to ensure the effectiveness of economic development. Types of financial intermediaries. Regulation of the financial system.
- Topic 3. Financial mathematics and bases of financial calculationsSimple and compound interest. Effective rate. Banking and mathematical dis-assignment. Applications of simple and compound interest. Models of accounts with variable capital. Commercial and actuarial rules for a binary model. Consolidated payments. Inflation accounting. Accounting for taxation of interest income Refinancing rate The notion of financial flow. Timing chart. Calculation of the value of the financial stream, which has the character of rent. Credit calculations. Repayment of debt by one payment at the end of the term. Repayment of debt in installments by differentiated and annuity payments. Long-term credit schemes. Calculation of the effective rate. Short-term credit schemes. Calculation of the effective rate
- Topic 4. Hypothesis of an effective market and operations in an imperfect marketThe theory of rational expectations, formal statements and practice. Transaction costs. Liquidity. Introduction to taxation. Fundamentals of federal taxes. Early taxation and tax expenses. Average and marginal tax rates. Dividends and taxes on capital gains. Non-taxable bonds and a marginal investor. Taxes in the NPV. Tax regulation. Inflation. Determination of the inflation rate. Real and nominal interest rates. Interest rates and inflation expectations.
- Topic 5. Financial planningNecessity of financial planning. Objects and subjects of financial planning. Contents and purpose of financial planning. Financial plan, its meaning and essence in the process of financial planning. Types of financial plans. Tasks of financial planning. The main objectives of financial planning. Stages of financial planning. Methods of financial planning.
- Topic 6. Investments and performance evaluationsApplications and recommendations for budgeting (NPV) "Economics of Project Interaction". Final project selection rule Project pairs and external factors Comparison of projects with different indicators. Expected, typical and most likely scenarios. Future unforeseen circumstances and real options. option evaluation in a risk-neutral environment. Decision trees: one set of parameters Decision trees: one set of parameters The index of profitability. Internal rate of return (IRR) Payback period problem.
- Topic 7. Fundamentals of Corporate FinanceThe basic concept of management decisions, methodical provision of financial management. Structure and cost of capital. The concept of payment for items the company's capital. The concept of the company's working capital. Internal and external sources of funding. Analysis and evaluation of the financial condition of the company. Models achievable economic growth.
- Topic 8. Capital StructureCapital structure in an ideal market Maximizing the value of shares or the value of a firm? Modigliani and Miller (M & M), The informal way. Modigliani and Miller (M & M), "Formal way in perfect markets." Dividends. Weighted average cost of capital (WACC) in the ideal world of M & M. A numerical example in a risky world in which more risky means should offer higher ones. Expected Rate of Return The WACC formula (without taxes). The main mistake: if all securities are more risky, is the firm more risky? Influence of price-earnings ratios (again). Using the cost of capital CAPM and WACC in the NPV formula
- Topic 9. Valuation of financial assetsValuation of shares, bonds. Hedging, forward and futures contracts. Options. Swaps. Pricing of derivative financial instruments.
- Topic 10. Financial strategyGoals and logic. Detailed horizon vs. time gap. Methods: Direct extrapolation of historical cash flows; with detailed modeling of financial indicators. Policies and calculations from Pro Forma components. The cost of capital. The cost of capital, taking into account the growth rate of cash flows. Alternative assumptions and sensitivity analysis.
- Topic 11. International Finance and Monetary PolicyThe foreign exchange market. Exchange rates in the long and short term. Currency fluctuations. Purchasing power parity. The international financial system. The role of the international financial market in monetary policy. The regulation of the exchange rate as a goal and a method of monetary policy.
- HomeworkThe home assignments can be completed both individually and in groups (up to 5 participants). The maximal grade for an assignment is 100 points.
- In-class participationThe in-class participation covered the attendance and in-class activity. The maximal grade for the in-class participation is 20 points.
- Final examThe final exam consists of questions for each topic of the course and lasts 80 minutes. The maximal grade for the exam is 100 points.
- Written assignment
- Interim assessment (1 module)0.5 * Final exam + 0.25 * Homework + 0.1 * In-class participation + 0.15 * Written assignment
- Danthine, J.-P., & Donaldson, J. B. (2014). Intermediate Financial Theory (Vol. 3rd ed). Burlington: Academic Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=485499
- Shleifer, A. (2000). Inefficient Markets: An Introduction to Behavioral Finance. Oxford University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.oxp.obooks.9780198292272