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Finance Theory Lecture Notes

Jul 9, 2024

Finance Theory Lecture Notes

Introduction

  • Course Title: 15.401 Finance Theory
  • Audience: First-year MBA students primarily
  • Duration: 13-week course
  • Instructor Background:
    • 20 years at MIT
    • Taught at Wharton for 4 years
    • PhD in Economics from Harvard University

Importance of Finance

  • Finance applies to practical management problems
  • Core Message: Finance is essential in business and management
  • Key Characters in Finance: James Simons, Warren Buffett, Jack Welch
  • Finance Equation: Finance = Mathematics + Money

Class Framework

  • Components: Households, Financial Intermediaries, Non-financial Corporations, Capital Markets
  • Focus Areas: Valuation of assets, management of assets
  • Valuation: Involves figuring out value
  • Management: Involves making decisions based on valuations
  • Importance of Time and Risk: Fundamental to financial analysis

Financial Principles

  1. No Free Lunch: Systematic free lunches don't exist
  2. Individual Preferences: More money to less, money now to money later, less risk to more risk
  3. Self-interest: Agents act in their self-interest, often framed in economic terms
  4. Other Fundamental Principles: To be covered later in the course

Personal Application

  • Student Task: Apply course principles to personal finance
  • Household Finance Elements:
    • Cash raised from financial institutions
    • Cash invested in real assets (e.g., education)
    • Cash generated by labor
    • Cash invested in financial assets
  • Management Questions: What to buy, when to buy, how to finance, how much to save or spend

Course Structure

  • Sections:
    1. Introduction and Motivation
    2. Valuation and Discounting
    3. Risk Introduction and its Implications
    4. Application to Corporate Finance
  • Final Lecture: Discuss practical implications and limitations of theories

Course Requirements

  • Readings: Selected chapters from Brealey, Myers, and Allen
  • Participations and Attendance: 10%
  • Case Study: 10%
  • Midterm Exam: 25%
  • Final Exam: 55% (Cumulative)

Practical Elements

  • Pro Seminar: Practice of Finance for real-world insights
  • Lecture Notes: Provided ahead of time, but purposely incomplete for note-taking
  • Assignments: Work on problems alone and in groups
  • Questions: Encouraged to ask questions to engage with the material

Summary

  • Goal: Equip students with financial logic applicable to career and personal decisions
  • Expectations: High engagement and active participation throughout the course

Full transcript