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 


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

                       M/Th 10:00 – 11:00          instructor’s                       

                            Th: 2:00 – 3:00             course:              

                              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 (4th ed.)

                         Student Solutions Manual (4th 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 (3rd ed.)

McDonald, Derivative Markets (2nd ed.)

Megginson, Corporate Finance Theory

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

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

Panjer (ed.), Financial Economics

Gollier, The Economics of Risk and Time



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



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


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


March 24

evidence of market efficiency

Ch. 11

March 31

corporate tax effect on value 


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




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.




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.


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