BØK 1121 Finance I
This introductory course focuses on acquiring basic skills in applying mathematical finance and standard models used to assess profitability. Moving from an economic environment characterized by complete certainty, the analysis subsequently extends to incorporate uncertainty (risk) and how uncertainty affects the required rate of return on real-investment projects. Since the required rate of return emanates as an alternative cost of capital in well-functioning markets, the course also provides a brief introduction to capital market theory.
Upon completing the course, it is expected from students that they:
- Understand how financial mathematics (application of different discounting models) facilitates correct calculation (and estimation) of the time value of money.
- Understand how different models used to analyse profitability (net present value, internal rate of return, payback) facilitate estimate of the expected return on real investments.
- Understand how portfolio theory and diversification helps identify and distinguish, as well, between relevant (systematic) and irrelevant (unsystematic) risk.
- Understand why the capital asset pricing model (CAPM) generates required rates of return that appropriately take into account only relevant risk for investors in well-functioning markets.
Having completed this course, it is expected that students know how to:
- To apply financial mathematics (discounting models) in order to correctly calculate the time value of money for a variety of applications.
- To apply different models of profitability (net present value, internal rate of return, payback) in order to estimate real investments expected return.
- Apply portfolio theory and the notion of diversification to distinguish between relevant (systematic) and irrelevant (unsystematic) risk for investors.
- Applying the Capital Asset Pricing Model (CAPM) in order to calculate expected (required) rates of return taking into account, and including, only investors' exposure to relevant (systematic) risk in well-functioning markets.
A main focus of the course is understanding the assumptions based on which the different models of profitability are based. Successful application requires comprehension of the models' limitations in practical use.
- Introduction: Brief overview of main topics and their general role in modern managerial economics.
- The basic tools of financial mathematics
- Models of profitability and use of decision criteria when applying the net present value principle, the internal rate of return and payback models.
- Portfolio diversification and estimation of relevant risk.
- Capital asset pricing model to estimate the risk-adjusted, required rate of return.
There are 15 sessions each loading 2 lecture hours for a total of 30 lecture hours. Immediately following each class, there is a two-hour plenary session where home-assignments (distributed in advance) are reviewed and discussed with the lecturer present. A total of 13 home assignments are reviews in 14 weekly plenary sessions allowing students to test their progress when it comes to skills and comprehension of the course material. In three of the 14 sessions, student assistants are also present and available to answer questions from the students.
In order to accommodate an active and inspiring learning environment, two-way communication between students and the lecturer is vitally important. It is expected from students that they participate during class and during the plenary sessions by asking questions.
Excel software is used when working financial mathematics problems and firms' multi-year capital budgeting analysis. Students are strongly encouraged to acquire skills in Excel.
The course requires a normal work-effort of 12- 15 hours per week. As of the beginning of the semester, students are made aware of the required amount of work.
Deviations in teaching and exams may occur if external conditions or unforeseen events call for this.
Basic courses in mathematics I and managerial economics during the Fall semester of Year 1, and mathematics II, statistics, and microeconomics during the Spring semester of Year 1.
|Exam category||Weight||Invigilation||Duration||Support materials||Grouping||Comment exam|
Form of assessment:
Examination every semester
|Form of assessment:||Written submission|
|Support materials:|| |
|Resit:||Examination every semester|
Individual problem solving
Feedback activities and counselling
Prepare for teaching
A course of 1 ECTS credit corresponds to a workload of 26-30 hours. Therefore a course of 7,5 ECTS credit corresponds to a workload of at least 200 hours.