Learn the Foundations of Modern Finance with MIT Professors

Content and Handouts

Lecture 1.1: Financial Decisions of Households and Corporations

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Lecture 1.2: Approaches to Valuing Financial and Real Assets

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Lecture 1.3: Valuation of Assets

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Lecture 1.4: The Principle of Arbitrage

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Lecture 1.5: Arbitrage and Asset Valuation

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Lecture 1.6: Financial Market

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Lecture 1.7: Functions of Financial Markets and Market Imperfections

Lecture 1.8: Unifying Principles of Finance

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Recitation 1.1: Financial Assets

Recitation 1.2: Financial Institutions

Recitation 1.3: Gross and Net Return

Recitation 1.4: Trading Mechanics

Recitation 1.5: Bonds

Recitation 1.6: Expected Return

Recitation 1.6: Volatility

Problem Set Instructions

1 - Which of the following is an asset? Yes, No, or Uncertain.

2 - In your view, do the following activities create value/wealth? Yes, No, or Uncertain.

3 - On which side of a firm's balance sheet should the following items be recorded, Asset or Liability?

4 - Problem Statement

4 - Answer the following Yes or No.

5 - How would you characterize the following entities? A financial intermediary (I), securities market (M), or neither (N).

6 - How do the following activities allocate resources? Shift them over time (T), change their risk profile (R), or both (B).

7 - Is the following a form of friction/imperfection in the financial market? Yes, No, or Uncertain.

Content and Handouts

Lecture 2.1: State Space Model for Time and Risk

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Lecture 2.2: Arbitrage Pricing

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Lecture 2.3: Present Value and Future Value, Part I

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Lecture 2.4: Present Value and Future Value, Part II

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Lecture 2.5: Present Value and Future Value, Part III

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Lecture 2.6: Nominal and Real Cash Flows and Returns

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Recitation 2.1: Expected Return on Bond

Recitation 2.1: Expected Return on Stock

Recitation 2.2: Price of Bond

Recitation 2.2: Price of Stock

Recitation 2.3: Finding State Prices from Asset Prices

Recitation 2.4: Finding Asset Price and Return (Asset X)

Recitation 2.4: Finding Asset Price and Return (Asset Y)

Recitation 2.4: Expected Return from State Prices (Asset X and Y)

Recitation 2.5: Present Value (A)

Recitation 2.5: Present Value (B)

Recitation 2.6: Future Value (A)

Recitation 2.6: Future Value (B and C)

Recitation 2.7: Inflation and Real Rates (A)

Recitation 2.7: Inflation and Real Rates (B)

Recitation 2.7: Inflation and Real Rates (C)

Recitation 2.7: Inflation and Real Rates (D)

Recitation 2.7: Inflation and Real Rates (E)

Recitation 2.7: Inflation and Real Rates (F)

Recitation 2.7: Inflation and Real Rates (G)

Recitation 2.7: Inflation and Real Rates (H)

Problem Set Instructions

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6

Content and Handouts

Lecture 3.1: Discount Rate and Asset Return

Lecture 3.2: Historical Return and Risk

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Lecture 3.3: Special Cash Flows

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Lecture 3.4: Compounding

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Lecture 3.5: Mortgage Loans

Lecture 3.6: Extensions

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Recitation 3.1: Regular Annuity

Recitation 3.2: Delayed Annuity

Recitation 3.3: Growing Annuity

Recitation 3.4: Delayed Perpetuity

Recitation 3.5: Growing Perpetuity - Part A

Recitation 3.5: Growing Perpetuity - Part B

Recitation 3.5: Growing Perpetuity - Part C

Recitation 3.6: APR vs EAR

Recitation 3.7: Mortgage Loans - Part A

Recitation 3.7: Mortgage Loans - Part B

Problem Set Instructions

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6

Question 7

Content and Handouts

Lecture 4.1: Fixed Income Introduction

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Lecture 4.2: Yield Curve

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Lecture 4.3: Discount versus Coupon Bonds

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Lecture 4.4: Relative Bond Valuation

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Lecture 4.5: Yield To Maturity

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Lecture 4.6: Yield Curve Dynamics

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Lecture 4.7: Interest Rate Risk and Bond Duration

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Lecture 4.8: Bond Duration and Convexity

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Lecture 4.9: Inflation Risk

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Recitation 4.1: Bond Pricing

Recitation 4.2: Bond Arbitrage - Part A

Recitation 4.2: Bond Arbitrage - Part B

Recitation 4.2: Bond Arbitrage - Part C

Recitation 4.3: Bond Prices and Yield to Maturity

Recitation 4.4: How to Find YTM

Recitation 4.5: Duration - Part A

Recitation 4.5: Duration - Part B

Recitation 4.5: Duration - Part C

Recitation 4.5: Duration - Part D

Recitation 4.6: Interest Rate Risk - Part A

Recitation 4.6: Interest Rate Risk - Part B

Recitation 4.7: Convexity - Part A

Recitation 4.7: Convexity - Part B

Recitation 4.7: Convexity - Part C

Recitation 4.7: Convexity - Part D

Recitation 4.7: Convexity - Part E

Problem Set Instructions

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8

Question 9

Question 10

Content and Handouts

Lecture 5.1: Stocks Introduction

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Lecture 5.2: Discounted Cash Flow Model

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Lecture 5.3: Constant Growth Model

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Lecture 5.4: Multistage Growth Model

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Lecture 5.5: Forecasting Dividends

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Lecture 5.6: Growth Opportunities and Growth Stocks

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Lecture 5.7: Growth Opportunities and Stock Valuation

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Lecture 5.8: Valuation of Operating Businesses

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Recitation 5.1: Dividend Discount Model

Recitation 5.2: Constant Growth Dividend Discount Model

Recitation 5.2: Constant Growth Dividend Discount Model - Alternate Approach

Recitation 5.3: Two-Stage Growth Model - Part A

Recitation 5.3: Two-Stage Growth Model - Part B

Recitation 5.4: Investment and Growth

Recitation 5.4: Investment and Growth - Part A

Recitation 5.4: Investment and Growth - Part B

Recitation 5.4: Investment and Growth - Part C

Recitation 5.5: Constant Reinvestment and Profitability Model - Part A

Recitation 5.5: Constant Reinvestment and Profitability Model - Part B

Recitation 5.6: Investment and Firm Value - Part A

Recitation 5.6: Investment and Firm Value - Part B

Content and Handouts

Lecture 6.1: Risk and Return Introduction

Lecture 6.2: Expected Utility

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Lecture 6.3: Risk Aversion

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Lecture 6.4: Mean-Variance Preferences

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Lecture 6.5: Asset Returns

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Lecture 6.6: Other Dimensions of Risk

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Lecture 6.7: Joint Distributions of Returns

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Lecture 6.8: Portfolios

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Lecture 6.9: Portfolios: Risk and Return

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Lecture 6.10: Systematic and Idiosyncratic Risk

Recitation 6.1: Expected Utility - Part A

Recitation 6.1: Expected Utility - Part B

Recitation 6.1: Expected Utility - Summary

Recitation 6.2: Certainty Equivalent - Part A

Recitation 6.2: Certainty Equivalent - Part B

Recitation 6.2: Certainty Equivalent - Part C

Recitation 6.2: Certainty Equivalent - Part D

Recitation 6.3: Risk Premium - Part A

Recitation 6.3: Risk Premium - Part B

Recitation 6.3: Risk Premium - Part C

Recitation 6.4: Statistical Properties of Return

Recitation 6.5: Financial Portfolios - Part A

Recitation 6.5: Financial Portfolios - Part B

Recitation 6.6: Portfolio Leverage - Part A

Recitation 6.6: Portfolio Leverage - Part B

Recitation 6.6: Portfolio Leverage - Part C

Recitation 6.6: Portfolio Leverage - Part D

Recitation 6.6: Portfolio Leverage - Summary

Recitation 6.7: Portfolio Risk and Return - Part A

Recitation 6.7: Portfolio Risk and Return - Part B

Recitation 6.7: Portfolio Risk and Return - Part C

Recitation 6.7: Portfolio Risk and Return - Part D

Recitation 6.7: Portfolio Risk and Return - Part E

Recitation 6.7: Portfolio Risk and Return - Part F

Recitation 6.8: Diversification

Content and Handouts

Lecture 7.1: The Main Idea of APT

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Lecture 7.2: Factor Models

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Lecture 7.3: Well Diversified Portfolios

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Lecture 7.4: Expected Returns on Diversified Portfolios

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Lecture 7.5: Factor Risk Prices / Risk Premia

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Lecture 7.6: Factor-Mimicking Portfolios

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Lecture 7.7: APT for Individual Securities

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Lecture 7.8: Implementation of APT (Macro Factor Model)

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Lecture 7.9: Implementation of APT (Portfolio Factor Model)

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Recitation 7.1: Statistical Properties of Returns in Factor Models - Part A

Recitation 7.1: Statistical Properties of Returns in Factor Models - Part B

Recitation 7.2: Idiosyncratic Volatility of a Large Portfolio - Part A

Recitation 7.2: Idiosyncratic Volatility of a Large Portfolio - Part B

Recitation 7.2: Idiosyncratic Volatility of a Large Portfolio - Part C

Recitation 7.2: Idiosyncratic Volatility of a Large Portfolio - Part D

Recitation 7.3: Detecting Arbitrage in Factor Models

Recitation 7.4: Factor Risk Premia

Recitation 7.5: Factor Models: An Empirical Example - Part A

Recitation 7.5: Factor Models: An Empirical Example - Part B

Content and Handouts

Lecture 8.1: Market Efficiency

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Lecture 8.2: The Challenger Crash

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Lecture 8.3: Market Efficiency: A Testable Definition

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Lecture 8.4: Weak Form of EMH

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Lecture 8.5: Semi-Strong Form of EMH

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Lecture 8.6: Event Studies: Firm Announcements

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Lecture 8.7: Asset Management

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Lecture 8.8: Strong Form of EMH

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Lecture 8.9: Discussion

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Recitation 8.1: Dividend Announcements Event Study

Content and Handouts

Lecture 9.1: Corporate Financial Decisions

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Lecture 9.2: Opportunity Cost of Capital and Net Present Value (NPV)

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Lecture 9.3: How Should Financial Managers Make Investment Decisions?

Lecture 9.4: Example 1

Lecture 9.5: Example 2

Lecture 9.6: Objectives of Financial Managers

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Recitation 9.1: Corporate Financial Decisions

Recitation 9.2: Opportunity Cost of Capital

Recitation 9.3: Value Maximization

Recitation 9.4: Market Value Balance Sheet

Content and Handouts

Lecture 10.1: NPV Rule

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Lecture 10.2: Accounting Earnings vs. Cash Flows

Lecture 10.3: The Effect of Inventory on Cash Flows

Lecture 10.4: Capital Budgeting Example

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Lecture 10.5: Required Rate of Return on a Project

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Lecture 10.6: Payback Period Rule

Lecture 10.7: Internal Rate of Return

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Lecture 10.8: Profitability Index

Lecture 10.9: Other Considerations in Capital Budgeting Decisions

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Recitation 10.1: After-tax Cash Flows

Recitation 10.2: Working Capital

Recitation 10.3: The Impact of Working Capital on Cash Flows

Recitation 10.4: Payback Period Rule

Recitation 10.5: Internal Rate of Return

Recitation 10.6: NPV and IRR Rules

Final Exam