Foundation of Finance
Foundations of Finance: Overview
Prof. Alex Shapiro
Lecture Notes 1: Overview
This lecture introduces much of the terminology we will use in the course, and we will describe it in more detail later. For now, to set the stage, we will review it very briefly in class, but make sure to get the supplemental details from the textbook.
I.
Readings
II. Asset Classes
III. Characteristics of an Asset
IV. The Financial System
V.
Financial Markets
VI. Financial Intermediaries
VII. Trends
VIII. Additional Readings
Buzz Words:
(No) Arbitrage, Present Value,
Risk, Risk Aversion, Risk Adjustment,
Portfolios, Diversification,
Option Value, Equilibrium, Liquidity
1
Foundations of Finance: Overview
I. Readings
A. BKM Chapter 1.
B. Skim BKM Chapter 2.
C. Articles distributed in class
Insert Figure 1-1:
2
Foundations of Finance: Overview
II. Asset Classes
A. Real Assets
1. natural resources.
2. physical capital.
3. human capital.
4. “Cultural” Capital
5. Intellectual Property
B. Financial Assets (referred to as securities)
Specify level, timing and conditions for payment of cash, goods or other financial assets. 1. Money a medium of exchange (a paper claim backed by the government), is held to allow the completion of transactions.
2. Debt a claim to a predetermined payment stream, usually secured on a set of real or financial assets (maturity is time from issue to expiration).
3. Equity residual claim to a set of real or financial assets (usually of a corporation) usually coupled with corporate control.
4. Derivatives payoff is dependant on the value of some other (usually financial) asset.
5. Combinations of the above
Example: Callable Bond
3
Foundations of Finance: Overview
C. Illustration: Debt vs. Equity.
Suppose XYZ Co s assets pay off a random amount of Cash Flow
(CF) in 1 year s time and XYZ has issued debt with a promised payment of $100 in 1 year s time, and equity. The
Prof. Alex Shapiro
Lecture Notes 1: Overview
This lecture introduces much of the terminology we will use in the course, and we will describe it in more detail later. For now, to set the stage, we will review it very briefly in class, but make sure to get the supplemental details from the textbook.
I.
Readings
II. Asset Classes
III. Characteristics of an Asset
IV. The Financial System
V.
Financial Markets
VI. Financial Intermediaries
VII. Trends
VIII. Additional Readings
Buzz Words:
(No) Arbitrage, Present Value,
Risk, Risk Aversion, Risk Adjustment,
Portfolios, Diversification,
Option Value, Equilibrium, Liquidity
1
Foundations of Finance: Overview
I. Readings
A. BKM Chapter 1.
B. Skim BKM Chapter 2.
C. Articles distributed in class
Insert Figure 1-1:
2
Foundations of Finance: Overview
II. Asset Classes
A. Real Assets
1. natural resources.
2. physical capital.
3. human capital.
4. “Cultural” Capital
5. Intellectual Property
B. Financial Assets (referred to as securities)
Specify level, timing and conditions for payment of cash, goods or other financial assets. 1. Money a medium of exchange (a paper claim backed by the government), is held to allow the completion of transactions.
2. Debt a claim to a predetermined payment stream, usually secured on a set of real or financial assets (maturity is time from issue to expiration).
3. Equity residual claim to a set of real or financial assets (usually of a corporation) usually coupled with corporate control.
4. Derivatives payoff is dependant on the value of some other (usually financial) asset.
5. Combinations of the above
Example: Callable Bond
3
Foundations of Finance: Overview
C. Illustration: Debt vs. Equity.
Suppose XYZ Co s assets pay off a random amount of Cash Flow
(CF) in 1 year s time and XYZ has issued debt with a promised payment of $100 in 1 year s time, and equity. The