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Financial Markets

Financial Markets. Prof. André Farber SOLVAY BUSINESS SCHOOL UNIVERSITÉ LIBRE DE BRUXELLES Saigon, April 2004. What did we learned together?. Monday: Bond valuation Bond prices and interest rates: duration Asset Liability Management Term structure of interest rates Tuesday:

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Financial Markets

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  1. Financial Markets Prof. André FarberSOLVAY BUSINESS SCHOOLUNIVERSITÉ LIBRE DE BRUXELLES Saigon, April 2004

  2. What did we learned together? • Monday: • Bond valuation • Bond prices and interest rates: duration • Asset Liability Management • Term structure of interest rates • Tuesday: • Stock valuation – dividend discount model • How to calculate g : Return on Retained Earnings and Retention Ratio • Net Present Value of Growth Opportunities • Wednesday: • Company valuation – free cash flow model • Capital budgeting with inflation • Introduction to risk, random variables, expected returns, standard deviation A.Farber Vietnam 2004

  3. ..and more.. • Thursday • Using the normal distribution – confidence interval, Value at Risk • Market efficiency: stock prices are unpredictable • Asset allocation between 1 risk-free asset and 1 risky asset • Friday • Diversification and the importance of covariance / correlation • Choosing an optimal portfolio • CAPM: the optimal portfolio is the market portfolio • Beta • Saturday • The risk expected return relationship • Capital structure and the cost of capital • Introduction to options A.Farber Vietnam 2004

  4. How to prepare the exam • 3 hours • 5 questions, each 4 questions • Some easy, some more challenging • Formula sheet with exam + present value tables • Past exams are on my website A.Farber Vietnam 2004

  5. Review my slides • Make sure that you understand • Don’t be afraid by formulas • Try to understand what they mean – many can be expressed in Vietnamese • Use the Excel files to get a better understanding of the calculations • Bond valuation • ALM and duration • Electraviet: stock valuation and NPVGO • Stock market – Monte Carlo simulation – discrete distribution • Using the normal distribution: Normal distribution and value at risk • Efficient set calculation – 2 risky assets • Option pricing: 1-period binomial model A.Farber Vietnam 2004

  6. Use the book • Chap 4.4: Net Present Value : Simplifications • Chap 5: How to Value Bonds and Stocks • Chap 25.5 (4th ed. 24.5) Duration Hedging • Chap 7.3 Inflation and Capital Budgeting • Chap 9: Capital Market Theory: An Overview • Chap 10: Return and Risk: The Capital-Asset-Pricing Model • Chap 12: Risk, Cost of Capital and Capital Budgeting • Chap 13: Corporate-Financing-Decisions and Efficient Capital Markets (13.1 to 13.3) • Chap 22: Options and Corporate Finance: Basic Concepts A.Farber Vietnam 2004

  7. Practice • 54 short questions in the book. Work them out. Solutions are on my website • Present value 5 • Bonds 7 • Stocks valuation 9 • Investment decisions 4 • Risk and Return 19 • Cost of capital with debt 2 • Options8 • Total 54 A.Farber Vietnam 2004

  8. Practice even more • Short cases • Past exams A.Farber Vietnam 2004

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