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CAPITAL MARKET THEORY RSM 332 – Week a couple of Week 1 – Intro – Monetary Accounting (Review) Week 2 – Economical Markets and Net Present Value Week 3 – Present Value Concepts Week 4 – Bond Value and Term Structure Theory Week your five – Valuation of Stocks and shares Week six – Risk and Come back – Difficulty Set #1 Due Week 7* – Midterm (Tuesday*) Week almost 8 , Profile Theory Week 9 – Capital Advantage Pricing Style Week 15 – Arbitrage Pricing Theory Week 11 – Procedure and Performance of Capital Markets Week 12 – Course Assessment – Issue Set #2 Due Speak to: otto. [email, protected] utoronto.

ca CAPITAL MARKET THEORY RSM 332 – Week 2

PLAN 1 . 2 . 3. four. 5. Notices Financial Markets and Net Present Worth Survey Benefits Optional Materials (e. g. Cases, Functional Knowledge, Media, etc . ) Suggestions/Practice intended for Exam(s) Contact: otto. [email, protected] utoronto. ca Expanded Office Hours Friday, March 19th (11: 00am-3: 00pm) • Room 6 , TZ6 (Tanz Neuroscience Bldg – six Queen’s Area Crescent West) TBD , Saturday, August 20th • Depends when there is enough demand Thursday, March 25th (5: 00pm-7: 00pm and 7: 00pm-9: 00pm) • During regular timeslot • Cover optional material (e. g. cases, sensible knowledge, etc . ) Get in touch with: otto. [email, protected] utoronto. ca Exams Midterm (Tuesday, October 23rd – eight: 00pm-10: 00pm): • FORMER MATE 100 (Examination Facility – 255 McCaul Street) • 2 Hours Last (TBA): • 2 Hours Planning: • Problem Sets you , 2 • Crib Sheet (Start Early and 1-Sided) • Calculator (Silent) Contact: otto. [email, protected] utoronto. ca Tutorials • Starting , September 19/20/21 • Wednesday (6: 00pm-8: 00pm) • TZ6 (Tanz Neuroscience Bldg – 6 Queen’s Area Crescent West) • Thurs (11: 00am-1: 00pm) • RW 110 (Ramsay Wright Laboratories – 25 Harbord Street) • Friday (5: 00pm-7: 00pm) • RW 110 (Ramsay Wright Labs – twenty-five Harbord Street) Review: • Midterms and Finals (2008-2011) Xiaofei Zhao (xiaofei. [email, protected] utoronto. ca) • http://332ta. raykan. com • Contact: otto. [email, protected] utoronto. ca Outside of Lecture Office Several hours (Drop-In): • Wednesdays: some: 00pm-6: 00pm • a hundred and five St . George Street , Rotman (North Building) Place 413 or 417 Workplace Hours (Other Days/Times): • Extended Hours • By simply Appointment Contact: otto. [email, protected] utoronto. ca Company Finance: What’s going on? 3) Firm’s Financial (5) Investors (4) (Financial Corporations, (1) Individuals, Other Firms) (1) (2) (3) (4) (5) Funds raised via investors by selling financial resources Cash used real assets (some are intangible) Cash generated by simply operations Cash reinvested in the firm (retained earnings) Funds repaid to investors (interest, dividends, etc . ) Businesses (2) Decision Maker Reference point: Alex It Financial Markets: What is Going On? Companies (Users of Capital) Primary Public Supplying (IPO) Extra Offerings (SEO) Borrowing (Loans, Bonds)

Dividends, $ Repurchases, Interest Payments money Market Mechanisms or Market Makers (Stock Exchanges, Financial institutions, Investment Cash, …) $ $ Businesses Issue Inventory Certificates and Bonds money $$$ Used Stocks and Bonds Shareholders (Providers of Capital) Expenditure Banks help firms generate transactions Brokers/Dealers help shareholders make deals Reference: Alex MacKay Economical Theory and company Policy Part 1 (Copeland, Weston and Shastri) Course Reserve ECONOMICAL MARKETS AND NET PRESENT VALUE Usage Plan and Investment Rule

Consider 1 period problems Assumptions: • No uncertainness • One period (two dates), consumptions occur in date 0 and date 1 • A consumer is definitely endowed with initial wealth (Y0) about date 0, and will receive income (Y1) on time 1 • Simple rate of interest (r) Time 0 Reference: Raymond Kan Contact: otto. [email, protected] utoronto. ca Date 1 Consumption Strategy and Expense Rule 5 CASES • Case I actually: • Circumstance II: Zero Capital Marketplace, No Development Opportunities With Capital Industry, No Production Opportunities • Case 3: No Capital Market, With Production Chances • Case IV: With Capital Market, With Creation Opportunities

Guide: Raymond Kan Contact: otto. [email, protected] utoronto. florida Consumption and Investment without Capital Marketplaces C1 U2 U1 U0 C0 Reference: Copeland, Weston, Shastri (Financial Theory Speak to: otto. [email, protected] utoronto. ca and Corporate Policy) 4 th Copy 2004 Consumption and Expenditure without Capital Markets C1 Slope from the Tangent (-ve) = (Marginal Rate of Substitution) (MRS) MRS =? C1? C0 U1 U(C0, C1) MRS =? U /? C0? U as well as? C1 C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. florida and Corporate Policy) 4 th Edition 2004 Consumption and Investment without Capital Market segments

C1 Production/Investment Opportunity Set C0 Research: Copeland, Weston, Shastri (Financial Theory Speak to: otto. [email, protected] utoronto. ca and Corporate Policy) some th Copy 2004 Intake and Expenditure without Capital Markets C1 Rate where a money of intake today (C0) is converted by effective investment into a dollar of consumption (C1) tomorrow. C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. los angeles and Corporate Policy) 4 a Edition 2004 Consumption and Investment without Capital Market segments C1 C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and Corporate Policy) 4 a Edition 2004 Consumption and Investment without Capital Market segments C1 Marginal Rate of Transformation (MRT) MRT sama dengan? C1? C0 C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and Corporate Policy) 4 th Copy 2004 Intake and Investment without Capital Markets C1 U1 C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. florida and Corporate Policy) 4 th Edition 2005 Consumption and Investment with no Capital Markets C1 Y1 U1 Reference Bundle: (Y0, Y1) Y0

Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. los angeles and Corporate Policy) 4 th C0 Edition 2004 Consumption and Expenditure without Capital Markets C1 Increase expense until MRT = MRS U1 C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. california and Corporate Policy) 4 th Edition 2004 Consumption and Investment devoid of Capital Market segments C1 U2 U1 C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. florida and Corporate Policy) 4 a Edition 2004 Consumption and Investment with no Capital Marketplaces

C1 MRT = MRS U2 U1 C0 Reference: Copeland, Weston, Shastri (Financial Theory Speak to: otto. [email, protected] utoronto. ca and Corporate Policy) some th Copy 2004 Ingestion and Purchase without Capital Markets C1 U2 U1 (Increase Investment) Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. florida and Corporate Policy) 4 th C0 Model 2004 Intake and Purchase with Capital Markets C1 Slope sama dengan -(1+r) Funding and Financing opportunities (Capital Market Line) (at marketplace interest rate r) C0 Research: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and company Policy) four th Edition 2004 Ingestion and Purchase with Capital Markets C1 Interest as well as Principal (Invest/Lending) Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. los angeles and Corporate Policy) 4 a C0 Release 2004 Ingestion and Expense with Capital Markets C1 Interest as well as Principal (Borrowed Amount – Principal) Reference point: Copeland, Weston, Shastri (Financial Theory Speak to: otto. [email, protected] utoronto. ca and company Policy) 4 th C0 Edition 2005 Consumption and Investment with Capital Market segments C1 U1 C0

Research: Copeland, Weston, Shastri (Financial Theory Speak to: otto. [email, protected] utoronto. ca and Corporate Policy) 4 th Model 2004 Usage and Purchase with Capital Markets C1 Y1 U1 Endowment: (Y0, Y1) Y0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. florida and Corporate Policy) 4 a C0 Release 2004 Intake and Expenditure with Capital Markets C1 (Invest) Y1 U1 Y0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and Corporate Policy) 4 a C0 Copy 2004 Consumption and Expense with Capital Markets C1

Market level of come back &gt, Very subjective Time Choice (1+r) &gt, (1+rtime preference) Y1 U1 Y0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and company Policy) some th C0 Edition 2004 Consumption and Investment with Capital Markets C1 U1 (Consume Less) Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and Corporate Policy) 4 th C0 Release 2004 Consumption and Investment with Capital Markets C1 U1 (Invest) Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and Corporate Policy) 4 a C0

Model 2004 Consumption and Purchase with Capital Markets C1 U2 Y1 U1 Y0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. florida and Corporate Policy) 4 a C0 Edition 2004 Intake and Investment with Capital Markets C1 Market Interest = Very subjective Time Desire U2 Y1 U1 Y0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. florida and Corporate Policy) 4 a C0 Edition 2004 Consumption and Purchase with Capital Markets (With Production Set) C1 U1 C0 Guide: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] barcelone. ca and Corporate Policy) 4 th Edition 2004 Consumption and Purchase with Capital Markets (With Production Set) C1 C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. florida and Corporate Policy) 4 th Edition 2005 Consumption and Investment with Capital Markets (With Creation Set) C1 C0 Reference: Copeland, Weston, Shastri (Financial Theory Get in touch with: otto. [email, protected] utoronto. ca and Corporate Policy) four th Copy 2004 Ingestion and Investment with Capital Markets (With Production Set) C1 C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and Corporate Policy) 4 th Edition 2004 Consumption and Investment with Capital Marketplaces (With Production Set) C1 C0 Reference point: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and Corporate Policy) some th Release 2004 Usage and Purchase with Capital Markets (With Production Set) C1 U3 = (production and capital market) U2 = (with production alone) U1 sama dengan (initial endowment) C0 Research: Copeland, Weston, Shastri (Financial Theory Get in touch with: otto. [email, protected] utoronto. ca and company Policy) 4 th Edition 2004 Consumption Plan and Investment Guideline

Consider 1 period problems Assumptions: • No concern • One period (two dates), consumptions occur about date zero and date 1 • A consumer is usually endowed with initial wealth (Y0) in date 0, and will get income (Y1) on day 1 • Simple interest rate (r) Day 0 Reference point: Raymond Kan Contact: otto. [email, protected] utoronto. los angeles Date one particular Consumption Program and Investment Rule some CASES • Case I: • Case II: Zero Capital Industry, No Development Opportunities With Capital Industry, No Creation Opportunities • Case III: No Capital Market, With Production Opportunities • Case IV: With Capital Marketplace, With Production Opportunities Guide: Raymond Kan Contact: otto. [email, protected] utoronto. california Consumption Program and Expense Rule CASE I , No Capital Market, Zero Production Options • Customer can consume Y0 upon date 0, and Y1 on particular date 1 Date 0 Guide: Raymond Kan Contact: otto. [email, protected] utoronto. ca Date one particular Consumption Prepare and Expenditure Rule CIRCUMSTANCE II , With Capital Market, Zero Production Chances The pair of consumption programs is broadened 1 . installment payments on your Consumer conserve from Y0, invests in economical assets, and consumes even more on particular date 1 Get against Y1, consume even more on date 0, payback loan with interest upon date one particular from Y1, and ingest less about date one particular Date zero Reference: Raymond Kan Speak to: otto. [email, protected] utoronto. ca Day 1 Consumption Plan and Investment Secret CASE II , With Capital Marketplace, No Creation Opportunities • Denote C0 and C1 as date 0 and date 1 consumption respectively • Limitation on them can be: C1 sama dengan (Y0 , C0) (1+r) + Y1 Consumption Budget Line (Constraint) C0 & C1 = Y0 + Y1 1+ r 1+ r Con Date zero Reference: Raymond Kan Contact: otto. [email, protected] utoronto. ca Day 1 In general, the consumer will be better off with capital markets Consumption Program and Investment Rule CASE II , With Capital Market, No Production Options Present Benefit • For just about any cash flow, C0, C1, determine its present value as: PV = C0 + C1 + r • Budget constraint can be restated as: • The present value of usage equals the modern day value of income Time 0 Reference: Raymond Kan Contact: otto. [email, protected] utoronto. los angeles Date 1 Consumption Strategy and Expense Rule CIRCUMSTANCE II , With Capital Market, Simply no Production Opportunities Example: • Assume a buyer has a useful $1. 5M on particular date 0, and will have an profits of $0. 55M in date 1 • The eye rate is usually 10%. • The present worth of total income is definitely: $2M = $1. 5M + $0. 55M (1+ 0. 10) Date 0 Reference: Raymond Kan Get in touch with: otto. [email, protected] utoronto. ca Particular date 1 Usage Plan and Investment Guideline

CASE 3 – Simply no Capital Market, With Creation Opportunities Physical Investment • Suppose the customer is also a business person who determines a physical expense opportunity • Initial investment requires $0. 5M in date zero • Returning of $0. 85M in date one particular • Should certainly this consumer/investor take this project? • With no capital industry, it depends in her/his utility function Reference: Raymond Kan Contact: otto. [email, protected] utoronto. los angeles Consumption Prepare and Expense Rule CIRCUMSTANCE IV – With Capital Market, With Production Opportunities • Simply by investing $0. 5M within a financial advantage, receive $0. 55M inturn (i.. 10% return) • By investing $0. 5M in a physical asset, receive $0. 85M in return (i. e. 70% return) • Consumer/Investor should take this project • Rate of interest is also referred to as the opportunity expense of capital • i. at the. Return foregone by investing in a project rather than in comparable investment alternatives Reference: Raymond Kan Contact: otto. [email, protected] utoronto. ca Consumption Prepare and Expense Rule CASE IV – With Capital Market, With Production Chances Net Present Value (NPV) • Is definitely the project’s net contribution to wealth (i. e. present value minus initial investment) NPV = C0 & C1 1+ r Inside the above case, the NPV of the project is: NPV = -$0. 5M + $0. 85M = $0. 2727M (1 + 0. 10) Reference: Raymond Kan Contact: otto. [email, protected] utoronto. ca Consumption Prepare and Expenditure Rule CIRCUMSTANCE IV – With Capital Market, With Production Options NPV Regulation • Claims that: • If a task has a confident NPV, we need to accept it • When a project contains a negative NPV, we should reject it Equivalent Rules • NPV Regulation – Agree to positive NPV projects • Rate-of-Return Secret – Invest in projects which offer a rate higher than the cost of capital Reference: Raymond Kan Speak to: otto. [email, protected] utoronto. ca A Separation Theorem You are in a Honda (HMC) shareholders’ meeting • Three shareholders are quite singing about what the corporation should do Shareholder #1 – Old Lady • Wishes money at the moment • Would like HMC to invest in sports autos which will produce a quick earnings Shareholder #2 – Associated with a Little Kid’s Trust Pay for • Would like money a considerable ways in the future • Wants HMC to invest in building electric automobiles Shareholder #3 – Young Professional • Wants cash at some specific time in long term (i. e. 10 years) • Wishes HMC to make smaller vehicles because of an expected essential oil crisis Reference: Raymond Kan Contact: otto. [email, protected] utoronto. california A Separation Theorem

So what do you think Honda managers should do? Reference: Raymond Kan Contact: otto. [email, protected] utoronto. ca A Separation Theorem What do you imagine Honda managers should do? MAXIMIZE VALUE Reference point: Raymond Kan Contact: otto. [email, protected] utoronto. los angeles A Parting Theorem In general, each shareholder may want: • Maximum riches • Capacity to transfer riches across time into intake • Choose risk attributes of ingestion plan Every single shareholder, however , can: • Achieve very own consumption strategy through investments in financial property • Accomplish risk characteristics of strategy by investing in approximately risky securities

EQUITY (CAPITAL GAINS, DIVIDENDS) Reference: Raymond Kan Speak to: otto. [email, protected] utoronto. ca A Separation Theorem In general, each shareholder might prefer: • Maximum wealth • Ability to transfer wealth around time in to consumption • Choose risk characteristics of consumption program Each shareholder, however , can: • Obtain own intake plan through investments in economical assets • Achieve risk characteristics of plan by purchasing more or less dangerous securities EQUITY (CAPITAL PROFITS, DIVIDENDS) PERSONAL DEBT (INTEREST) DUTY AGENCY COSTS Reference: Raymond Kan Get in touch with: otto. [email, protected] utoronto. ca A Separation Theorem In general, every shareholder might want: • Optimum wealth • Ability to transfer wealth across time into consumption • Choose risk characteristics of consumption program Each shareholder, however , may: WHAT TYPE OF INCOME DO YOU PREFER? • Achieve individual consumption strategy through investments in financial resources • Obtain risk qualities of plan by investing in approximately risky securities EQUITY (CAPITAL GAINS, DIVIDENDS) DEBT (INTEREST) TAX AGENCY COSTS Research: Raymond Kan Contact: otto. [email, protected] utoronto. florida

Consumption and Investment with Capital Markets (With Production Set) C1 U3 = (production and capital market) U2 = (with development alone) U1 = (initial endowment) C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. california and Corporate Policy) 4 a Edition 2004 Consumption and Investment with Capital Marketplaces (With Development Set) C1 C0 Guide: Copeland, Weston, Shastri (Financial Theory Speak to: otto. [email, protected] utoronto. ca and Corporate Policy) 5 th Copy 2004 Intake and Purchase with Capital Markets (With Production Set) C1 Select the optimal development decision by taking on assignments until the minor rate of return on investment equals the objective market rate) C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. los angeles and Corporate Policy) 4 a Edition 2005 Consumption and Investment with Capital Marketplaces (With Production Set) C1 (Choose the optimal consumption routine by borrowing or loaning along the capital market series to equate your subjective time inclination with the market rate of return) C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] toronto. ca and Corporate Policy) 4 th Edition 2005 Consumption and Investment with Capital Marketplaces (With Production Set) C1 (Production/Investment Decision) (Consumption Decision) C0 Reference point: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and company Policy) 4 th Copy 2004 Consumption and Expense with Capital Markets (With Production Set) C1 (Production/Investment Decision) (Consumption Decision) (Fisher Separation Theorem) C0 Reference point: Copeland, Weston, Shastri (Financial Theory Get in touch with: otto. [email, protected] utoronto. ca and company Policy) some th Release 2004

Consumption and Purchase with Capital Markets (With Production Set) C1 (Fisher Separation Theorem) Given ideal and complete capital markets, the availability decision is definitely governed exclusively by an objective market qualifying criterion (represented by maximizing obtained wealth) with no regard to individuals’ subjective preferences that enter into consumption decisions C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. los angeles and Corporate Policy) 4 th Edition 2005 Consumption and Investment with Capital Market segments (With Development Set) C1 (Production/Investment Decision) (Consumption Decision) Fisher Separating Theorem) C0 Reference: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. florida and Corporate Policy) 4 th Edition 2004 Consumption and Investment with Capital Market segments (With Creation Set) C1 (Production/Investment Decision) (Consumption Decision) (Fisher Separating Theorem) MRS = MRT = 1+r C0 Reference point: Copeland, Weston, Shastri (Financial Theory Contact: otto. [email, protected] utoronto. ca and company Policy) some th Release 2004 Usage and Purchase with Capital Markets (With Production Set) C1 EVERY INDIVIDUALS UTILIZE SAME TIME VALUE POUNDS (i. e. ame marketplace interest rate) IN MAKING THEIR PARTICULAR PRODUCTION/INVESTMENT DECISIONS (Fisher Splitting up Theorem) MRS = MRT = 1+r C0 Reference point: Copeland, Weston, Shastri (Financial Theory Get in touch with: otto. [email, protected] utoronto. ca and Corporate Policy) some th Edition 2004 Model Ronald, a finance scholar, has $400 cash-on-hand and has $1, 100 in trust via his grandmother. Ronald are getting the trust funds next year. (Market interest is 10% or trust funds well worth $1, 1000 today). Ronald has a couple of mutually exclusive expenditure opportunities (i. e. AAA and BETTER BUSINESS BUREAU rated investments). Contact: otto. [email, protected] utoronto. los angeles

Reference: Don Brean Model Ronald, a finance pupil, has $400 cash-on-hand and has $1, 100 in trust via his grandma. Ronald will receive the trust funds the coming year. (Market interest is 10% or trust funds worth $1, 500 today). Ronald has two mutually exclusive expense opportunities (i. e. AAA and BETTER BUSINESS BUREAU rated investments). 1 . 2 . 3. Which will investment should certainly Ronald purchase, AAA or BBB? How much should he invest? In the event that Ronald makes investment identify his money flows? (i. e. Ingestion spending divided equally in present value terms) Get in touch with: otto. [email, protected] utoronto. ca Reference: Don Brean Example

Ronald, a financial student, has $400 cash-on-hand and has $1, 75 in trust from his grandmother. Ronald will receive the trust cash next year. (Market interest rate is definitely 10% or trust money worth $1, 000 today). Ronald features 2 mutually exclusive investment opportunities (i. e. AAA and BBB rated investments). 1 ) Which expense should Ronald invest in, AAA or BETTER BUSINESS BUREAU? Contact: otto. [email, protected] utoronto. ca Reference: Add Brean Case in point Ronald, a finance pupil, has $400 cash-on-hand and has $1, 100 in trust coming from his granny. Ronald are getting the trust funds next year. (Market rate of interest is 10% or trust funds really worth $1, 000 today).

Ronald has 2 mutually exclusive investment opportunities (i. e. AAA and BETTER BUSINESS BUREAU rated investments). 1 . Which investment ought to Ronald invest in, AAA or BBB? Get in touch with: otto. [email, protected] utoronto. ca Guide: Don Brean Example Ronald, a fund student, features $400 cash-on-hand and offers $1, 95 in trust from his grandmother. Ronald will receive the trust cash next year. (Market interest rate is usually 10% or trust funds worth $1, 000 today). Ronald offers 2 contradictory investment opportunities (i. elizabeth. AAA and BBB ranked investments). 1 . Which expenditure should Ronald invest in, AAA or BBB? 2 . Simply how much should this individual invest? Get in touch with: otto. [email, protected] toronto. ca Reference point: Don Brean Example Ronald, a financing student, offers $400 cash-on-hand and offers $1, 90 in trust from his grandmother. Ronald will receive the trust funds next year. (Market interest rate is 10% or perhaps trust money worth $1, 000 today). Ronald offers 2 contradictory investment options (i. electronic. AAA and BBB scored investments). a few. If Ronald makes investment describe his cash goes? (i. at the. Consumption spending divided equally in present value terms) Contact: otto. [email, protected] utoronto. ca Reference: Wear Brean Example Ronald, a finance college student, has $400 cash-on-hand and has $1, 100 in trust coming from his granny.

Ronald should receive the trust funds next year. (Market rate of interest is 10% or trust funds well worth $1, 500 today). Ronald has two mutually exclusive expense opportunities (i. e. AAA and BETTER BUSINESS BUREAU rated investments). 3. If perhaps Ronald makes investment identify his money flows? (i. e. Intake spending divided equally in present benefit terms) PV of Wealth = PHOTOVOLTAIC of Consumption PV (C0) = PV (C1) (i. e. C0 = C1 / (1+r) ) NPVBBB Ronald’s PHOTOVOLTAIC of Riches = $400 + $1, 000 + $87. twenty-seven = $1, 487. twenty seven $1, 487. 27 sama dengan C0 + C1 as well as (1+r) = C0 & [C0 (1+r)] / (1+r) C0 sama dengan $743. sixty four and C1 = $818 Contact: otto. [email, protected] utoronto. ca Reference: Don Brean Model

Ronald, a finance pupil, has $400 cash-on-hand and has $1, 100 in trust via his grandmother. Ronald will receive the trust funds next year. (Market rate of interest is 10% or trust funds worth $1, 500 today). Ronald has a couple of mutually exclusive investment opportunities (i. e. AAA and BBB rated investments). 3. If perhaps Ronald makes investment identify his money flows? (i. e. Ingestion spending divided equally in present benefit terms) C0 = $743. 64 Purchase in BETTER BUSINESS BUREAU Cash Flow Necessity (CF0) sama dengan ($743. sixty four + $300) = $1, 043. sixty four Borrowing Need = CF0 , $400 = $643. 64 Speak to: otto. [email, protected] utoronto. ca Guide: Don Brean Example

Ronald, a fund student, has $400 cash-on-hand and features $1, 90 in trust from his grandmother. Ronald will receive the trust funds next year. (Market interest rate is usually 10% or trust cash worth $1, 000 today). Ronald offers 2 contradictory investment chances (i. at the. AAA and BBB rated investments). a few. If Ronald makes expense describe his cash moves? (i. e. Consumption spending divided similarly in present value terms) C1 sama dengan $818 Return from BBB Cash Influx (next year) = $1, 100 + $426 sama dengan $1, 526 Cash Output (next year) = $818 + $643. 64 + $64. thirty six = $1, 526 Loan Repayment Fascination on Financial loan @ 10% Contact: otto. [email, protected] utoronto. a Reference: Don Brean Example Ronald, a finance scholar, has $400 cash-on-hand and has $1, 100 in trust coming from his grandmother. Ronald will receive the trust funds the coming year. (Market rate of interest is 10% or trust funds really worth $1, 500 today). Ronald has two mutually exclusive purchase opportunities (i. e. AAA and BETTER BUSINESS BUREAU rated investments). CONCLUDING BELIEVED Ronald’s optimum investment decision (i. e. 300 dollar in BBB) is 3rd party or individual from his decision concerning how he inter-temporally allocates his ingestion (i. elizabeth. C0 and C1) The independence of these two decisions is referred to as the Fisher Separating Theorem. Speak to: otto. [email, protected] utoronto. ca Reference point: Don Brean “GET TO FIND OUT YOU” REVIEW (Name: Optional) Question #1: • What has occurred in your other courses that you were content about and want to be incorporated into this system? • What has occurred in your other courses that you were NOT happy about? Problem #2: • Anything certain you would like to study? What are your learning goals through this course? • Any specific requests in the instructor, TAs, program, additional support personnel, etc? Query #3: • Are you thinking of pursuing further education in Finance, if not then so what do you have in mind? And/or, What job(s) are you interested in?

Question #4: • Tell me more about your self (e. g. goals, software concentration, 2nd or 3 rd year, etc, ) Problem #5: • Any other feedback, requests, ideas, etc? TAKE ~3 MINS INDIVIDUALLY TO FILL OUT STUDY TAKE ~ 5 MINUTES APPROACH 5 CLASSMATES WHOM YOU HAVEN’T ATTAINED YET (write down initials) SURVEY BENEFITS (SUMMARY) • • • • • • • • • • • • • • • • • Real world experiences, practical (real-world) examples, cases, Relevant media (where to look for news), Current issues available in the market Relate content to real-world Exam tips/techniques Applications and excel designs used in the real world Interactive school, games, videos

Extended business office hours (availability) to address queries Humour Practice questions and solutions, Previous exams and solutions Capital markets (high-level overview) Common jobs in financing, Leading financing organizations Further tutorial period Stock picking, portfolio allocation/analysis, investment tools/strategies, trading guidelines Learning issues that can be applied in real world Relate designations/roles to content and applications Better comprehension of financial tools (e. g. Mortgages, provides, etc, ) View of finance from all other functional areas (e. g. Marketing) 13 Popular Case Studies (Failures) 1 . 2 . 3. 4. 5.. Barings (Bank) , Operational Risk (Trading Actions – Coming from arbitrageur to speculator) National Australia Bank – Operational and Industry Risks (Currency Trading) Bankgesellschaft Berlin (Bank) – Credit and Operational Risks (Loans to Property Developers) Taisei Fire and Marine Insurance Co – Insurance , Governance Risks (Uninsured exposure – Insufficient understanding) Wa Mutual (Bank) – Credit, Regulatory and Governance Hazards, Stress and Scenario Assessment (Low loaning standards and bad quality acquisitions) Fannie Mae and Freddie Macintosh – Credit, Market, Operational, Regulatory Governance and Moral Risk, Political figures vs .

Financial Risk Management (Sub-prime loans) Long-Term Capital Supervision , LTCM (Hedge Fund) – Industry , Unit Risks (Short liquid or Long Illiquid Investments (e. g.

Bonds) – The ussr Defaulted) Lenders Trust (Bank) – Operational Risk (Misled clients in derivatives purcahased by them) Orange County – Market and Interest Rate Dangers (Wrong method bet about interest rates – Borrowing Brief and Investing Long – Interest Rates Increased) Northern Rock (UK Bank) – Profile, Capital Funding, Operational and Reputational Dangers, Stress and Scenario Assessment (Sub-prime mortgages – Lender Run) Metallgesellschaft AG (Energy Group) – Market Dangers (Cash Stream Issues via Written Forwards) Worldcom (Telecom) – Detailed Risks (Accounting Fraud – Massive cquisitions , Debt) China Aviation Oil (Singapore) – Market and Governance Risks (Misreported oil futures trading losses, Un-hedged wide open short positions, Oil Prices Increased) Source: PRMIA 7. 8. on the lookout for. 10. 14. 12. 13. SURVEY AND BREAK 13 POPULAR CIRCUMSTANCE STUDIES Midterm 2011 – Q3 Get in touch with: otto. [email, protected] utoronto. ca Midterm 2011 – Q3 Portion A , Assume that there is no capital industry, which expenditure, A or B, is going to Jack choose? Justify your answer with calculations (6 marks) Get in touch with: otto. [email, protected] utoronto. ca Midterm 2011 – Q3 Part A , Assume that there is no capital market, which purchase, A or perhaps B, will Jack select?

Justify the answer with calculations (6 marks) • If Jack port does not spend, his power is zero • If perhaps Jack makes investment A (Utility is definitely? ) • If Plug makes investment B (Utility is? ) • Y0 = $500 and Y1 = $0 • Cost savings = Investment = Con , C Contact: otto. [email, protected] utoronto. california Midterm 2011 – Q3 Part A , Imagine there is no capital market, which will investment, A or B, will Plug choose? Rationalize your response with measurements (6 marks) • Investment A • UA = (500-244)1/4 (400)1/2 = 80 Contact: otto. [email, protected] utoronto. los angeles Midterm 2011 – Q3 Contact: otto. [email, protected] utoronto. ca

Part A , Imagine there is no capital market, which in turn investment, A or B, will Jack choose? Justify your answer with calculations (6 marks) • Investment B • UB (I) = (500-I)1/4 (50(I)1/2)1/2 • UB (I) = (50)1/2 [(500-I)I]1/4 • Find I* by distinguishing UB (I) wrt I (set to zero) • dUB(I) sama dengan (50)1/2 (1/4) [(500-I)I]-3/4 (500-2I) dI I* = two hundred fifty Derivatives (Review) Reference: Matn J. Osborne http://www. economics. utoronto. ca/osborne/MathTutorial/CLCF. HTM Speak to: otto. [email, protected] utoronto. ca Midterm 2011 – Q3 Portion A , Assume that there is no capital industry, which expenditure, A or B, will Jack select?

Justify your answer with calculations (6 marks) • Investment B • UB (250) = (50)1/2 [(500-I)I]0.25 • UB (250) = 111. 85 • UB &gt, UA Contact: otto. [email, protected] utoronto. california Midterm 2011 – Q3 Part A , Imagine there is no capital market, which will investment, A or M, will Jack port choose? Warrant your response with computations (6 marks) • Be aware: Two techniques to calculate I* • 1st method (take derivative of Utility Function) • Precisely the 2nd technique? Contact: otto. [email, protected] utoronto. ca Midterm 2011 – Q3 Alternatively , Investment N Contact: otto. [email, protected] utoronto. ca Midterm 2011 – Q3

Part W – Which in turn investment, A or N will Jack choose? Precisely what is his utilitymaximizing investment I* and the optimal consumption plan? (6 marks) (Assume a great capital industry for asking for and lending exists and the market interest is 20%) Contact: otto. [email, protected] utoronto. ca Midterm 2011 – Q3 Part B – Which usually investment, A or M will Jack choose? Precisely what is his utilitymaximizing investment I* and the ideal consumption strategy? (6 marks) • Plug will select the investment while using highest NPV • Determine NPVA and NPVB Contact: otto. [email, protected] utoronto. ca Midterm 2011 – Q3

Part B – Which expense, A or perhaps B is going to Jack select? What is his utilitymaximizing expenditure I* as well as the optimal intake plan? (6 marks) • NPVA sama dengan -$244 + ($400)/(1+0. 20) = $89. 33 Contact: otto. [email, protected] utoronto. ca Midterm 2011 – Q3 Get in touch with: otto. [email, protected] utoronto. ca Part B – Which expense, A or perhaps B can Jack select? What is his utilitymaximizing expense I* as well as the optimal usage plan? (6 marks) • To solve to get NPVB • Need to find optimal purchase (I*) • set MRT = -(1+r) = -1. 20 I* = $434. 03 • MRT = , dF/dI = -25/(I1/2) = -1. 20 • F = 50 ($434. 31/2) = $1041. 67 • NPVB = -$434. 03 + ($1041. 67/1. 20) sama dengan $434. goal Midterm 2011 – Q3 Part B – Which usually investment, A or M will Jack port choose? Precisely what is his utilitymaximizing investment I* and the maximum consumption plan? (6 marks) • To solve for optimum consumption plan (i. electronic. C0*and C1*) Contact: otto. [email, protected] utoronto. florida Midterm 2011 – Q3 Part N – Which in turn investment, A or B will Plug choose? Precisely what is his utilitymaximizing investment I* and the ideal consumption plan? (6 marks) • To fix for ideal consumption strategy (i. at the. C0*and C1*) • Total Wealth = $500 & $434. 03 = $934. 3 (set equal to C0 + C1/(1+r)) • PHOTO VOLTAIC Wealth = PV Intake • C1 = 1120. 84 – 1 . 2C0 Contact: otto. [email, protected] utoronto. ca Midterm 2011 – Q3 Contact: otto. [email, protected] utoronto. ca Part N – Which usually investment, A or B will Jack choose? What is his utilitymaximizing investment I* and the ideal consumption program? (6 marks) • To fix for optimum consumption prepare (i. at the. C0*and C1*) • Total Wealth = $500 + $434. goal = $934. 03 (set equal to C0 + C1/(1+r)) • U(C0, C1) sama dengan C01/4 (1120. 84 – 1 . 2C0 )1/2 • dU/dC0 sama dengan (1/4)C0-3/4 (1120. 84 – 1 . 2C0)1/2 – 1 ) 2 back button (1/2)C01/4(1120. some – 1 . 2C0)-1/2 • Setting this equal to no: 1120. 84 – 1 . 2C0 = 2 . 4C0 C0* sama dengan $311. thirty four • C1* = 1120. 84 – 1 . 2C0 = $747. 22 Midterm 2011 – Q3 Portion B – Which expenditure, A or perhaps B will Jack choose? What is his utilitymaximizing expense I* and the optimal usage plan? (6 marks) (Assume a perfect capital market intended for borrowing and lending exists and the marketplace interest rate is definitely 20%) • Alternatively: To resolve for maximum consumption strategy (i. elizabeth. C0*and C1*) Contact: otto. [email, protected] utoronto. florida Midterm 2011 – Q3 Part M – Which in turn investment, A or B will Plug choose?

What is his utilitymaximizing investment I* and the ideal consumption strategy? (6 marks) • On the other hand: To solve to get optimal usage plan (i. e. C0*and C1*) • MRS = , (1+r), which leads to • , (C1/2C0) = 1 . a couple of C1 sama dengan 2 . 5 C0 • Budget constraint: C0 + C1 as well as (1+r) = Total Wealth = $934. 03 C1 = 1120. 84 – 1 . 2C0 C0* sama dengan $311. 34 C1* sama dengan $747. 22 Contact: otto. [email, protected] utoronto. los angeles Midterm 2011 – Q3 Part C , Jack port can retain the services of a staff member to watch over one purchase for him. As a result, he can now buy both creation opportunities if perhaps he wishes.

If he hires a worker, he has to spend wages in equal instalments (i. at the. Same salary today and then period). What maximum wage per period would Plug be offering? (4 marks) Contact: otto. [email, protected] utoronto. los angeles Midterm 2011 – Q3 Part C , Plug can retain the services of a employee to supervise one expense for him. As a result, he can now invest in both production opportunities if he wants. If he hires a worker, he has to spend wages in equal payments (i. e. Same salary today and next period). What maximum income per period would Plug be willing to pay? (4 marks) • NPVA = $89. 33 sama dengan W + (W/1. 20) • T = $48. 3 (i. e. Optimum wage per period) Speak to: otto. [email, protected] utoronto. ca Midterm 2011 – Q3 Part D – Jill earns an income of $250 today and $250 next period but does not have any access to virtually any production possibilities. She may, however spend some money today to purchase expenditure opportunity M. Her power function is usually: U(C0, C1) = C0 + 2C1 + min(C0, C1) Precisely what is the highest price that Jill is offering? (4 marks) Contact: otto. [email, protected] utoronto. california Midterm 2011 – Q3 Part D – Jill earns positive cash-flow of $250 today and $250 next period but has no use of any development opportunities.

The lady can, however spend some funds today to acquire investment opportunity B. Her utility function is: U(C0, C1) sama dengan C0 + 2C1 + min(C0, C1) What is the best price that Jill can be willing to pay? (4 marks) • With a best capital market, the Fisher Separation Theorem applies • So the optimum amount she could pay is definitely $434. 03 (i. at the. NPVB) Get in touch with: otto. [email, protected] utoronto. ca MONETARY MARKETS AND NET PRESENT VALUE (TO SUCCEED , PRACTICE, PRACTICE, PRACTICE) Week 3 – Quick Review (Self-Evaluation) of Week 2 “GET TO BE AWARE OF YOU” STUDY (Name: Optional)

Question #1: • What has took place in your different courses that you just were completely happy about and would like to be integrated into this system? • What has occurred in your additional courses that you were NOT completely happy about? Question #2: • Anything particular you would like to master? What are your learning goals in this course? • Any particular requests from the instructor, TAs, program, different support personnel, etc? Problem #3: • Are you thinking of going after further education in Financing, if certainly not then so what do you have in mind? And/or, What job(s) are you interested in? Problem #4: • Tell me even more about yourself (e.. goals, program attention, 2nd or perhaps 3rd year, etc, ) Question #5: • Any other comments, demands, suggestions, and so forth? TAKE ~3 MINUTES INDIVIDUALLY TO COMPLETE SURVEY TAKE ~ 5 MINUTES TO TALK TO your five CLASSMATES WHICH YOU HAVE NOT MET HOWEVER (write down initials) STUDY RESULTS (SUMMARY) • • • • • • • • • • • • • • • • • Real world experiences, sensible (real-world) examples, cases, Relevant news (where to find news), Current issues in the market Relate course material to real world Test tips/techniques Applications and exceed models utilized in the real world Active class, video games, videos

Prolonged office several hours (availability) to deal with questions Connaissance Practice questions and alternatives, Past tests and solutions Capital markets (high-level overview) Typical jobs in finance, Leading finance businesses Additional tutorial time Inventory picking, profile allocation/analysis, expenditure tools/strategies, trading tips Learning topics which can be applied in real life Associate designations/roles to course material and applications Better understanding of financial instruments (e. g. Mortgages, bonds, etc, ) Watch of financing from other useful areas (e. g. Marketing) http://www. explorefinancialservices. om/Options http://www. explorefinancialservices. com/ Financial Markets: What is Going On? Firms (Users of Capital) First Public Supplying (IPO) Extra Offerings (SEO) Borrowing (Loans, Bonds) Dividends, $ Repurchases, Interest Payments bucks Market Components or Marketplace Makers (Stock Exchanges, Banking companies, Investment Money, …) bucks $ Firms Issue Inventory Certificates and Bonds dollar $$$ Used Stocks and Bonds Investors (Providers of Capital) Purchase Banks support firms help to make transactions Brokers/Dealers help investors make orders Reference: Alex MacKay 113 Hedge Pay for Strategies Devoted Short

Origin: AIMA Canada Further Browsing Hedge Funds , Rising Market Approach • Growing Markets (American Depository Invoices – ADRs vs . International Securities) http://www. sec. gov/pdf/ininvest. pdf (Page 12) (SAP) Hedge Finance , Quants • John Simons (Renaissance Technologies) , Commodities/Futures – (Rapid Flames Trading) – (computer and system professionals, researchers and traders) (computational linguists–speech recognition/investing) • http://chinese-school. netfirms. com/abacus-hedge-funds-Jim-Simons. html • • Kenneth Griffin (Citadel Investment Group) – Convertible Bonds –&gt, Long-Short • http://money. cnn. om/2008/12/08/news/companies/citadel_vickers. boyd. fortune/index. htm The Quants (Scott Patterson – Wsj Reporter) • • http://www. businessweek. com/magazine/content/10_09/b4168070829612. htm http://online. wsj. com/article/SB10001424052748704509704575019032416477138. html Steven Palmer (AlphaNorth Asset Managing Inc) (Microcap – Tech) • http://www. theglobeandmail. com/globe-investor/funds-and-etfs/funds/top-hedge-fund-manager-turns-to-techmicro-caps/article1884049/ House Dems propose taxing equity trades to fund fresh federal programs • • • Monetary transaction taxes on almost all stock (0. 5%), bond (0. %) and derivatives (0. 005%) trades Shields financial marketplaces from speculation Make high-frequency trading “unprofitable” http://thehill. com/blogs/floor-action/house/249893-house-dems-propose-taxing-equity-trades-to-fund-new-federal-programs Harsh HFT curbs can sneak into MiFID • • • • Advantages of bare minimum resting instances between deals Could force HFT organizations out of the industry, widening distributes and producing trading more pricey Meetings held with the European Parliament’s Economical and Economic Affairs Committee (ECON) MiFID (Markets in Financial Instruments Directive) – European Union Law http://www. hetradenews. com/news/Regions/Europe/Harsh_HFT_curbs_could_sneak_into_MiFID_II. aspx CAPITAL MARKET THEORY RSM 332 – Week 2 Week 1 – Introduction – Financial Accounting (Review) Week 2 – Financial Markets and Net Present Worth Week several – Present Value Ideas Week four – Connection Valuation and Term Framework Theory Week 5 – Valuation of Stocks Week 6 – Risk and Return – Problem Collection #1 Due Week 7* – Midterm (Tuesday*) Week 8 , Portfolio Theory Week 9 – Capital Asset Prices Model Week 10 – Arbitrage Pricing Theory Week 11 – Operation and Efficiency of Capital Market segments Week doze – Training course Review – Problem Set #2 Because of

Contact: otto. [email, protected] utoronto. ca THANK YOU HELP YOU NEXT WEEK! OFFICE HOURS WEDNESDAYS – four: 00PM-6: 00PM ROOM 413 OR 417 105 ST GEORGE AVENUE ROTMAN (NORTH BUILDING)

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