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
8604868382
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
Introduction to the Applied Mathematics of Corporate Finance and Introduction to Derivatives and Option Pricing Models
Copeland et al, Financial Theory and Corportate
Policy (4^{th} ed.)
Student Solutions Manual (4^{th} ed.)
Responsible for substantial additional nontext material presented in class
Various resources as referenced in the text, plus
Ho & Lee, The
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
Term Paper 35%
Takehome 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 


Jan. 21 
introduction: decisions about value 


Jan. 28 
financial statement analysis: where and when is the cash? expected cash flow; DCF valuation 
handout Ch. 2AH 

Feb. 4 
closed form financial analysis 


Feb. 11 
free form financial analysis 


Feb. 18 
risk: variance of cash flow 
Ch. 5AD 

Feb. 25 
capital asset pricing model (CAPM) 
Ch. 5EF, 6AH 

Mar. 3 
market risk premium; arbitrage pricing theory (APT) 
Ch. 6IM 

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. 15AE 

April 14 
financing decisions: capital structure, practical considerations 


April 21 
dividend policy: cash plus information, effect on value 


April 28 
real options  where value comes from 



Final Exam TBD week of May 5 to May 10 
All 

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 takehome 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.
Takehome Tests
One or two takehome tests will be assigned during the course of the semester.
Both the syllabus and the grading plan are subject to change with appropriate advance notice to the class.