Summary of the ‘Introduction To Finance’ Course
The purpose of this course is to (i) put a student into the “financial mindset” – that most of the things around us have monetary value and we often need to estimate it and (ii) give a student the basic set of tools for valuation. No matter which route of finance a student is taking (sales, trading, investment banking or corporate finance or general management) – mastering the concepts and tools from this course is crucial. All other advanced classes in finance are built on these concepts and use these tools.
The course begins with introducing the concept of time value of money. We then progresses to study how to value several commonly used financial instruments (stocks, bonds, options, futures), how to choose between investment projects (i.e. capital budgeting) and what happens when we hold several instruments at once (portfolio management). For every topic, we follow the same approach: first understand theory (why things work that way) and then practice – how to recognize when to use a tool and then how to use it. Be prepared to solve a lot of numerical problems.
Recommended Textbook for Introduction To Finance
The recommended textbook for this course is “Principles of Corporate Finance” by Brealey, Myers, Allen.
Duration of the course can vary, depending primarily on the amount of time a student is able to commit and the level of his or her quantitative background. In most cases, the course can be completed within 6-8 weeks, given 2 sessions per week. We can cram in daily sessions if the student has an urgent need.
Recommended follow up courses for Introduction To Finance
Recommended follow-up courses for students who would like to get a deeper knowledge of specific areas:
- Introduction to Corporate Finance – focuses on how companies manage cashflow, how they find money to keep running/expand and how they decide which projects to pursue. An essential course for those who are interested in corporate finance and investment banking.
- Advanced Corporate Finance – building on the previous course, discusses advanced topics and techniques such as valuing joint ventures and real options. This course would be particularly useful for students interested in corporate finance.
- Mergers and Acquisitions – studies why companies sometimes decide to buy other companies, how they come up with the price and what else surrounds the process (for example why a friendly merger is usually better than a hostile one). This course is essential for investment banking and corporate finance professionals.
- Entrepreneurial Finance – focuses on valuing early-stage companies and structuring venture capital investments. This course will be useful to students who are interested in start-ups and venture capital.
Course Outline: Introduction To Finance
- Financial markets and the objectives of financial management.
- Opportunity cost of capital.
- Basic discounting.
- Bond valuation.
- Yield curves, term structure, spot and forward rates.
- Duration and interest rate risk.
- Introduction to stocks, key terms and ratios.
- Overview of valuation methods (DDM, DCF, PVGO, ratios).
- Dividend discount model; Gordon model; Multi-stage growth models.
- Valuing growth.
- Valuing a business (DCF, comparables).
- Capital budgeting criteria.
- Forecasting and discounting project cash flows.
Return and risk.
- Historical returns.
- Measuring average returns, risk premiums and volatility.
- Random walks. Implications for long-run investing.
- Calculating portfolio risk.
- Efficient risk-return tradeoffs.
Capital Asset Pricing Model (CAPM)
- Assumptions and implications of the CAPM.
- Measuring betas and estimating the cost of capital.
Efficient markets and performance evaluation.
- Can mutual fund managers beat the market?
Introduction to derivatives.
- What is a derivative?
Futures, forwards and options.
- How futures markets work.
Introduction to options.
- How option markets work.
- Put-call parity.
- Spotting the option.
- Valuation principles (binomial and risk-neutral probability methods).