Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Fall 2015
Professor Albert Wang
Week 1 Agenda
Administrative
Personal / Syllabus
Class List: Student ID, Email
HW1 to-be-emailed this week, due Week 3 (1 Oct 2015)
Introduction
Jobs
What are investments?
Financial securities
How are securities traded?
Time value
Compounding
Equity Valuation and P/E ratios
Page 2
Personal Introduction
Education: Upenn Wharton, MIT Sloan
Work: Cornell Dyson, Industry Sellside and
Buyside
Now: Teaching in Taiwan to expose you to the
same course material as the top business
schools in the world
Primarily for those pursuing careers in finance
Also useful for anyone who has or wants money!
Learning standards and expectations will be the
same as any of the top Business Schools in the world
Page 3
Syllabus
In-class overview
Will be revised as needed
Page 4
Other Information
Prerequisites
College-level math, statistics, and intro
finance*
Junior/Senior Course
Classroom Etiquette:
Do not disturb your classmates
Silent typing if you bring a laptop
Turn off keystroke sounds and volume on any
electronic devices
Set cellphones to vibrate, answer for
emergencies only
Page 5
Other Information
Reading Guidelines
Read the main text first
Examples, cases, and appendices are optional
Page 6
Course Overview
This course is NOT
Intro Finance
A survey of all investment types
A specialized course on pricing
A memorization exercise
Page 7
Course Overview
This course IS
Investment Analysis
3 main tools of financial management
Increasing/reducing financial exposure
Diversifying financial exposure
Insuring financial exposure
Page 9
US Federal Reserve
Page 10
Page 11
Wealth creation?
At least welfare improvement no need to
gorge
Types of Investments
(selected)
Money Market (cash):
Fixed Income
Equities
Currencies
Commodities
Real Estate
Derivatives
Financial Jargon
Financial Instruments include financial
assets, derivatives, and other contracts
Financial Assets represent ownership of
assets
Stocks, bonds
Page 14
Businesses (corporates)
Primary Role: Raise Funds for Real
Investments
Governments (sovereigns)
Primary Role: Redistribute Wealth
ALL
Manage Risks
Page 15
Financial Innovations
Globalization
Domestic firms compete in global markets.
Continuous trading in many markets
Performance in regions depends on other regions.
Implications of Globalization
Allows international diversification of
investments and business lines
Aligns financial (and therefore political)
incentives of different countries
Imagine if each country has a SWF holding
an identical diversified portfolio
everyone would have identical financial
objectives
Financial Engineering
Bundling and unbundling of cash
flows
Slicing, allocation, and distribution
of cash flows
Examples: mortgage-backed security
tranches, principal/interest splits,
exotic options, etc.
Page 18
Financial Markets
Forums to transfer risks and
ownership between investors/traders
Example: Pen For Sale!
Primary Market
Public Offerings (IPO, SEO)
IBD
Secondary Market
Exchanges, OTC markets, etc.
Page 21
Financial Exchanges
Auction markets with centralized order
aggregation
Dealership function: can be
competitive or assigned by the
exchange (Specialists).
Examples: NYSE, AMEX, Regionals,
CBOE, TSEC
Page 22
Costs of Trading
Commission: fee paid to broker for
making the transaction
Bid/Ask Spread: cost of trading against
a limit order
Types of Orders
Instructions to the brokers on how to
complete the order
Market
Limit (good till specified time)
Stop loss
Programmed strategies
Do not confuse this with program trade, a
trade in a basket of 15+ stocks with market
value $1million+
Margin Trading
Owning only a portion of the value of an
investment, and borrowing the rest from the
broker
Shorting any investment in an amount where
the account could go to negative equity (for
stocks, commodities, or FX *any* amount
short requires a margin arrangement)
Margin arrangements differ vastly for
different financial instruments
Stocks ~50%, Futures ~10%, FX ~2%
Page 25
Page 26
Short Sale
Selling an asset that is not currently owned
A Short position profits from a decline in the price of
a stock or security.
Mechanics of a Short Sale
Borrow security through a dealer or from another
investor who is willing to loan it.
Sell it and deposit proceeds into margin account.
Closing out the position: buy the security and return
the shares to the party from which it was borrowed
instead of into own account.
Page 27
Page 28
Regulation of Securities
Markets
Institutions
Government Regulation
Self-Regulation
Reasons
Insider Trading
Corporate dishonesty (accounting
scandals, etc.)
Page 30
Growing Perpetuity
PV = C/(r-g)
Growing Annuities
Cash flow grows at a constant rate
PV = C/(r-g)[1-[(1+g)/(1+r)]^t)]
C/(r-g) pays out forever, C[(1+g)/(r(1+r)]^t negates
payments from t+1
Page 35
Review, Inflation
Inflation
Same dollar amount buys less in the
future
(1+nominal) = (1+ real)*(1+inflation)
Rule of thumb:
Always convert everything to nominal rates
and nominal cash flows, OR
Always convert everything to real rates and
real cash flows
Page 36
Review, Investment
Decisions
How do we decide if a project is
worthwhile?
3 methods (worst to best) :
3 Payback Period
2 IRR
1 NPV
Page 37
Review, IRR
IRR
Cost s
CFt
CFt 1
0
...
s
t
t 1
(1 IRR ) (1 IRR ) (1 IRR )
Page 39
Review (contd)
NPV=PV(All Project CFs)
NPV
Fair Projects are zero NPV since CFs are
discounted at cost of capital that is appropriate
for the risk taken, i.e. the appropriate opportunity
cost.
Example: if riskfree bonds cash flows are discounted at
the riskfree rate, then the resulting price is fair
Downfalls?
Page 40
Review, Compounding
Compounding Conversions and Conventions
Annual Percentage Rate (APR) = Nominal Annual Rate =
periodic rate * periods per year
Continuously Compounded Rate (CCR) = rate if paid
continuously
Effective Annual Rate (EAR, i.e. Annually) = rate if paid
APR n
once annually
EAR (1
) 1
EAR eCCR 1
Review, Compounding
Examples
10% APR compounded monthly =
(1+.1/12)^12-1 = 10.47% Annually
10% continuously compounded =
exp(.1)-1=10.52% Annually
10.52% Annually =
ln(1+.1052)-1 = 10% continuous
Page 42
rg
E/P rg
1
P/E
rg
In application
Page 43
Recommendation
Issue at 36.36 38.18
What other issues may come up on the day of primary
issuance?
Page 45