FIN 301 Introduction to Finance

Mishkin, Frederic S.,Eakins, Stanley Financial Markets and Institutions, 9th Edition (Pearson, 2018).
ISBN-10: 0-13-342362-X
ISBN-13: 978-0-13-342362-4

Students can obtain this text book from the following source:
http://www.mypearsonstore.com/bookstore/financial-markets-and-institutions-9780133423624

All reading and (optional) homework assignments referenced in this syllabus refer to this text

1) 1) In addition, it is recommended that students have the accompanying study guide by Pearson. This can be accessed here:
http://www.mypearsonstore.com/bookstore/study-guide-for-financial-markets-and-institutions-9780133427073

2) The following study guide will be made available upon enrollment:

Mishkin, Frederic S.,Eakins, Stanley PowerPoint Presentation accompanying Financial Markets and Institutions, 8th Edition (Pearson, 2015).

Lesson Overview

Lesson 1: Fundamentals of the Financial System
Read Chapter 1-2

In this lesson the students learn about the study of financial markets and institutions and give an overview of the entire financial system. The students look at debt and equity markets, exchanges and OTC markets, and money and capital markets. The students learn about the international bond markets and world stock markets. The students learn about transaction costs and risk sharing. The students learn about different types of financial intermediaries and government regulation of the financial system.

Lesson 2 – Interest Rates
Read Chapters 3-5

In this lesson the students look at interest rates and learn about their role in valuation. The students learn about why interest rates change and how risk and term structure affect interest rates. The students distinguish between real and nominal interest rates and returns. The students try to determine how efficient financial markets are. The students learn about why interest rates change and look at the supply and demand curves for the bond market. The students look at what causes shifts in the supply and demand curves for bonds. The students learn about how risk and term structure affect interest rates. The students learn about expectations theory, market segmentation theory and liquidity premium theory.

Lesson 3 –Financial Market Efficiency
Read Chapter 6

In this lesson the students learn about the efficient market hypothesis with respect to the financial market. The students look at the evidence in favor of and against financial market efficiency. The students analyze the value of published reports by financial advisors and learn about the value of “hot tips”. The students look at the causes of the rise and fall of stock prices and determine the effect of the day’s news headlines on stock prices.

Lesson 4 – Fundamentals of Financial Institutions
Read Chapters 7-8

In this lesson the students look at how transaction costs influence financial structure and if financial intermediaries are helpful in reducing transaction costs. The students look at the moral hazard d in the choice between debt and equity and the principle-agent problem. The students look at the causes of conflicts of interest and if it is truly a problem. The students look at agency theory with respect to financial crisis. The students learn about the problems of a continuing decline in stock prices and residential housing prices. The students learn about the 2007-2009 financial crisis and its causes.

Lesson 5 – Central Banking and the Conduct of Monetary Policy
Read Chapter 9-10

In this lesson the students learn about central banks and the Federal Reserve System. The students look at the structure of the Fed and its member banks. The students look at the role of the board of governors and the federal open market committee (FOMC). The students learn about the European central bank and how it differs from the Fed. The students learn about the structure and independence of other foreign central banks.

We look at the tools, goals, strategy, and tactics of national monetary policy. The students look at open market operations and discount lending. The students look at the market for reserves with respect to the federal funds rate. The students compare US monetary policy to the monetary policy tools of the European central bank. The students learn about inflation targeting and learn about the proper response to asset-price bubbles.

Lesson 6 – The Money Markets
Read Chapter 11

In this lesson the students define money markets and examine money market cost advantages. The students look at the purpose of the money markets and who participates in the money markets. The students learn about the US treasury department and the Federal Reserve System. The students learn about the role of commercial banks and investment and securities firms in the money market. The students look at different money market instruments such as treasury bills and federal funds. The students learn about repurchase agreements and negotiable certificates of deposit. The students learn about commercial paper and bankers’ acceptances. The students define Eurodollars and compare different money market securities. The students look at the role of interest rates in money markets and learn about liquidity. The students learn how to calculate the value of money market securities.

Lesson 7: The Bond Market
Read Chapter 12

In this lesson the students learn about purpose of the capital market. The students look at capital market participants and capital market trading. the students learn about types of bonds and distinguish between treasury notes and bonds. The students learn about Treasury bond interest rates and Treasury inflation-protected securities (TIPS). The students learn about treasury strips and agency bonds. The students learn about the 2007–2009 financial crisis and the bailout of Fannie Mae and Freddie Mac. The students differentiate between municipal bonds and corporate bonds and learn about risk in the municipal bond market. The students examine the characteristics of corporate bonds and look at types of corporate bonds. The students learn about financial guarantees for bonds and how to make a current yield calculation. the students also learn how to calculate the value of coupon bonds as well as the price of semiannual bonds.

Lesson 8: The Stock Market
Read Chapter 13

In this lesson the students learn about investing in stocks and distinguish between common stock vs. preferred stock. The students learn about how stocks are sold and learn how to compute the price of common stock. The students learn how to use the one-period valuation model. the generalized dividend valuation model, and the Gordon growth model. The students learn how to use the price earnings valuation method and how to how the market sets security prices. The students learn about the problems associated with estimating risk, estimating growth, and forecasting dividends. The students learn about the 2007–2009 financial crises and the stock market. The students look at the effects of the September 11 terrorist attack and the Enron scandal on the stock market. The students examine the different stock market indexes and look at the history of the Dow Jones industrial average. The students learn about the regulation of the stock market and the Securities And Exchange Commission (SEC).

Lesson 9: The Mortgage Markets
Read Chapter 14

In this lesson the students learn about mortgages and the characteristics of the residential mortgages. The students look at learn about mortgage interest rates and learn about the discount point decision. The students look at different loan terms and learn how mortgage loan amortization is done. The students look at types of mortgage loans such as insured and conventional mortgages and fixed- and adjustable-rate mortgages. The students look at different types of mortgage-lending institutions and loan servicing. The students learn about using the web to shop for mortgages. The students learn about the secondary mortgage market and the securitization of mortgages. The students look at mortgage-backed securities and different types of pass-through securities. The students learn about subprime mortgages and CDOs. The students learn about the significance of the real estate bubble

Lesson 10: The Foreign Exchange Market and the International Financial System
Read Chapters 15-16

In this lesson the students learn about foreign exchange market and international finance. The students learn about why exchange rates are important and how is foreign exchange traded. The students look at exchange rates in the long run and the law of one price. The students learn about the theory of purchasing power parity and why the theory of purchasing power parity cannot fully explain exchange rates. The students learn about the factors that affect exchange rates in the long run. The students use supply and demand analysis for domestic assets to determine equilibrium in the foreign exchange market and explain changes in exchange rates through shifts in the demand for domestic assets. The students learn about the implications of intervention in the foreign exchange market on the money supply. The students differentiate between sterilized and unsterilized intervention and learn about the balance of payments. The students look at different exchange rate regimes in the international financial system such as fixed exchange rate regimes and managed floats. The students look at capital controls on capital outflows and on capital inflows. The students learn about the role of the IMF as the international lender of last resort.

Lesson 11: Banking and the Management of Financial Institutions
Read Chapters 17-19

In this lesson the students look at the bank balance sheet in terms of liabilities and assets. The students learn about the general principles of bank management such as liquidity management and the role of reserves. The students learn about strategies for managing bank capital and learn about off-balance-sheet activities. The students look at the profitability of loan sales and the generation of fee income. The students examine regulation of financial institutions in terms of asymmetric information and government safety nets. The students learn about restrictions on asset holdings and capital requirements. The students look at assessment of risk management and disclosure requirements. The students look at restrictions on competition with respect to consumer protection. The students differentiate between macroprudential versus microprudential supervision and learn about the 1980s savings and loan and banking crisis and the Federal Deposit Insurance Corporation Improvement Act of 1991. The students look at the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The students learn about the growth of the shadow banking system and the current structure of the U.S. commercial banking industry with respect to bank consolidation and nationwide banking. The students learn about the Riegle-Neal interstate banking and branching efficiency act of 1994. The students look at the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 and the repeal of Glass-Steagal. The students learn about the implications for financial consolidation and the separation of the banking and other financial services industries throughout the world.

Lesson 12: Mutual Funds, Insurance Companies, and Pension Funds
Read Chapters 20-21

In this lesson the students begin by discussing the benefits of mutual funds and their organizational structure. The students look at different investment objective classes such as equity funds, bond funds, hybrid funds, money market funds, and index funds. The students look at the fee structure of investment funds and how mutual funds are regulated. The students look at hedge funds and conflicts of interest in the mutual fund industry. The students look at mutual fund abuses and government response to abuses.
We learn about insurance companies and the fundamentals of insurance. The students look at adverse selection and the moral hazard in insurance. The students look at the growth and organization of insurance companies and different types of insurance. The students look at risk-based premiums and restrictive provisions such as deductibles and limits on the amount of insurance. The students learn about different types of pensions such as defined-benefit pension plans, defined-contribution pension plans, and private and public pension plans. the students look at the regulation of pension plans with respect to the Employee Retirement Income Security Act and other individual retirement plans.

Lesson 13: Investment Banks, Security Brokers and Dealers, and Venture Capital Firms
Read Chapter 22

In this lesson the students learn about investment banking and investment banks. The students learn about the underwriting stocks and bonds and equity sales. The students look at mergers and acquisitions with respect to securities brokers and dealers. The students look at brokerage services and securities dealers. The students learn about the regulation of securities firms and the relationship between securities firms and commercial banks. The students learn about private equity investment and venture capital firms. The students look at the advantages of private equity buyouts and the life cycle of the private equity buyout.

Lesson 14: Risk Management in Financial Institutions
Read Chapter 23

In this lesson the students look at different methods of managing credit risk such as screening and monitoring long-term customer relationships and loan commitments. The students look at the uses of collateral, compensating balances, and credit rationing. The students learn about managing interest-rate risk and look at income gap analysis and duration gap analysis. the students look at specific examples of nonbanking financial institution and learn about some problems with income gap and duration gap analyses. The students look at different strategies for managing interest-rate risk.

Lesson 15: Hedging with Financial Derivatives
Read Chapter 24

In this lesson the students learn about hedging with respect to forward markets. The students look at interest-rate forward contracts and the pros and cons of forward contracts. The students look at financial futures markets and financial futures contracts. The students learn about the organization of trading in financial futures markets and the globalization of financial futures markets. the students learn about hedging foreign exchange risk with forward contracts and hedging foreign exchange risk with futures contracts. The students learn about stock index futures and stock index futures contracts. The students learn about possible causes of the market crash of 1987. The students look at options and option contracts. The students look at factors affecting the prices of option premiums and hedging with futures options. The students learn about interest-rate swaps and interest-rate swap contracts and hedging with interest-rate swaps. The students learn about the advantages and disadvantages of interest-rate swaps. The students look at the use of financial intermediaries in interest-rate swaps and credit derivatives such as credit options, credit swaps, and credit-linked notes. The students learn about the dangers of a subprime financial crisis.

Lesson 16: Financial Crises in Emerging Market Economies
Read Chapter 25

In this lesson the students look at dynamics of financial crises in emerging market economies. The students learn about the 1997-1998 crises in South Korea. The students learn about the implications of financial liberalization on the globalization process. The students look at the problems of uncertainty increase due to stock market decline and firm failure. The students learn about adverse selection and moral hazard problems with respect to economy contracts. The students learn about recovery with respect to severe fiscal imbalances and bank panic. The students learn about how to prevent preventing emerging market financial crises by beefing up prudential regulation and supervision of banks, as well as encouraging disclosure and using market-based discipline.

Lesson 17: Savings Associations and Credit Unions
Read Chapter 26

In this lesson the students look at mutual savings banks and savings and loan associations. The students look at mutual savings banks and savings and loans thrift crisis and regulatory forbearance. The students look at The Competitive Equality in Banking Act of 1987 and the political economy of the savings and loan crisis. The students learn about the principal–agent problem for regulators and politicians. The students learn about the Charles Keating and the Lincoln Savings and Loan scandal. The students learn about savings and loan bailout with respect to financial institutions reform, recovery, and The Enforcement Act of 1989. The students examine the savings and loan industry today in terms of the number of institutions, average size, assets, liabilities, and net worth. The students examine the industry in terms of capital, profitability, and health. The students learn about the future of the savings and loan industry. The students look at credit unions and their organization. the students learn about the advantages and disadvantages of credit unions in terms of their sources of funds and uses of funds.

Lesson 18: Finance Companies
Read Chapter 27

In this lesson the students look at the history of finance companies and their purpose. The students learn about risk in finance companies and look at different types of finance companies such as business (commercial) finance companies, consumer finance companies, and sales finance companies. the students learn about the regulation of finance companies and look at the finance company balance sheet with respect to assets, liabilities, income, and finance.

The student’s final grade will be based on a final examination. Examination questions will cover all topics covered in the readings. Students will have two hours to complete the final examination.  Students will be assigned a number grade from 0-100. A letter grade will also be issued in accordance with the following scale:

90-100 – A
80-89 – B
70-79 – C
0-69 – non passing