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.

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:

Plus one from:

This course may not be taken with:

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.

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.

Unseen written exam (3 hrs).

Brealey, R, Myers, S. and F. Allen Principles of Corporate Finance. 11th edition. (McGraw Hill)