University of Connecticut

Financial Mathematics II – Applied Mathematics of Corporate Finance

Math 369

Spring 2008

Classes: MW: 3:00 – 4:45 Instructor: James G. Bridgeman, FSA

MSB215 MSB408

860-486-8382 bridgeman@math.uconn.edu

Office Hours: W 11:00 – 12:00 websites:

M/Th 10:00 – 11:00 instructor’s www.math.uconn.edu/~bridgeman/index.htm

Th: 2:00 – 3:00 course: www.math.uconn.edu/~bridgeman/index.html

Or by appointment

Context for the Course

Required for the Professional Master’s degree in Applied Financial Mathematics

Certified for SOA/CAS Validation by Educational Experience (VEE) in Corporate Finance

Contains some material relevant for SOA exams FM and MFE

Specific Course Content

Introduction to the Applied Mathematics of Corporate Finance and Introduction to Derivatives and Option Pricing Models

Required Text

Copeland et al, Financial Theory and Corportate Policy (4^th ed.)

Student Solutions Manual (4^th ed.)

Responsible for substantial additional non-text material presented in class

Supplemental/Advanced Material (not required)

Various resources as referenced in the text, plus

Ho & Lee, The Oxford Guide to Financial Modeling

Chew, The New Corporate Finance/where theory meets practice (3^rd ed.)

McDonald, Derivative Markets (2^nd ed.)

Megginson, Corporate Finance Theory

Shreve, Stochastic Calculus for Finance I: Binomial Asset Pricing Model

Brealey Myers Allen, Principles of Corporate Finance (8^th ed.)

Panjer (ed.), Financial Economics

Gollier, The Economics of Risk and Time

Grading

Term Paper 35%

Take-home Tests 30%

Final Exam 35%

Both the syllabus and the grading plan are subject to change with appropriate advance notice to the class.

Outline & Intended Pace
Week of	Topic(s)	Material
all semester	each week 50 minutes will be devoted to derivative securities and option pricing, proceeding at a separate pace, usually on Mondays	Ch. 7, Ch. 9A-F
Jan. 21	introduction: decisions about value
Jan. 28	financial statement analysis: where and when is the cash? expected cash flow; DCF valuation	handout Ch. 2A-H
Feb. 4	closed form financial analysis	Ch. 14A
Feb. 11	free form financial analysis	Ch. 14B
Feb. 18	risk: variance of cash flow	Ch. 5A-D
Feb. 25	capital asset pricing model (CAPM)	Ch. 5E-F, 6A-H
Mar. 3	market risk premium; arbitrage pricing theory (APT)	Ch. 6I-M
March 17	market efficiency: ideology, cost of information	Ch.10
March 24	evidence of market efficiency	Ch. 11
March 31	corporate tax effect on value	14C
April 7	financing decisions: capital structure, MM theory	Ch. 15A-E
April 14	financing decisions: capital structure, practical considerations	Ch. 15F-L
April 21	dividend policy: cash plus information, effect on value	Ch. 16
April 28	real options - where value comes from	Ch. 9G-J
	Final Exam TBD week of May 5 to May 10	All

Term Papers

A paper will be due on May 2. You may choose any of the main topics in the syllabus (i.e. sections in the text or from class notes) and prepare a paper covering the topic in more depth, or presenting extensions of the material in the text or class notes, after consulting outside references. Alternatively, you may choose a topic from sections of the text not covered in the syllabus and explain how it works, including its connections with the material covered in the syllabus. You will submit a written topic selection on March 19 and a written outline on April 16.

Assignments

Every week text exercises will be assigned, not for collection and grading but to aid with your mastery of the material. You can check your own work against the solutions manual. Completion of this work will be assumed on take-home tests and on the final exam. Finally, background readings may be assigned in text sections not referenced in the syllabus. These will not be covered on tests or the exam, but should be read to enhance your understanding of the material.

Take-home Tests

One or two take-home tests will be assigned during the course of the semester.