You are here:

# Asset pricing and financial markets FN2190

This course is aimed at students who wish to understand how financial markets work and how securities are priced.

### Prerequisites/ Exclusions

Prerequisite: A course that you must have ordinarily attempted all elements of before you are permitted to register for another particular course.

If taken as part of a BSc degree, the following course(s) must be attempted before this course may be taken:

• EC1002 Introduction to economics

Plus one from:

• MT105a Mathematics 1
• MT105bĀ Mathematics 2
• MT1174 Calculus
• MT1186 Mathematical Methods.

This course may not be taken with:

• AC3059 Financial management
• FN3092 Corporate finance.

### Topics covered

• Present value calculations; discounting, compounding and the Net Present Value rule; quoted versus effective interest rates; annuities and perpetuities; Fisher separation.
• Bond valuation: valuing coupon, and zero coupon, bonds via present value methods; the term structure of interest rates and bond valuation; yield to maturity; interest rate risk and Macaulay duration; spot and forward interest rates; modelling the term structure of interest rates.
• Stock valuation: dividend discount models; the Gordon Growth model; earnings, payout ratios and stock prices; company valuation and the Present Value of Growth Opportunities.
• Portfolio Theory and the Capital Asset Pricing model: investor preferences; the mathematics of security portfolios; investor portfolio selection; market equilibrium and the CAPM; empirical evaluation of the CAPM and competing models.
• Efficient security markets: defining informational efficiency; why should markets be efficient?; problems with testing efficiency; evidence on the efficiency of stock markets; puzzles and anomalies.
• Derivative pricing: the definition of a derivative contract; how to price derivatives using absence of arbitrage; forwards and futures contracts; pricing forwards on stocks, currencies and commodities; option contracts; practical uses of options contracts; bounds on option premia; option pricing via binomial models and Black-Scholes.

### Learning outcomes

If you complete the course successfully, you should be able to:

• Describe the important differences between stock, bond and derivative securities.
• Explain how to price assets using both present value and absence of arbitrage methods.
• Apply present value techniques to price stocks and bonds
• Employ mathematical tools to compute risk and return for portfolios of securities.
• Evaluate portfolio choice problems.
• Present, explain and apply the Capital Asset Pricing model for computing expected stock returns.
• Critically evaluate the evidence for informational efficiency of stock markets
• Price derivative securities using absence of arbitrage.

### Assessment

Unseen written exam (3 hrs).