🪙 GOLD vs. 📈 STOCKS — Grandma's $1,000 Challenge8/20
Grandma gives you $1,000. You must choose all gold or
all stocks. Listen to different opinions, think about markets and risk,
and decide what you would do.
Quiz 1 — Group Work of 3
What is your choice: GOLD or STOCKS?
Show your rationale. Work together in a group of 3
and be ready to explain why your group made that choice.
Class Notes (collapse) — Chapters 1–2
1) Six parts of the financial system
Money
To pay for purchases and store wealth (fiat money, fiat currency).
Financial Instruments
Transfer resources from savers to investors and transfer risk to those best equipped to bear it.
Financial Markets
Buy and sell financial instruments.
Channel funds from savers to investors, thereby promoting economic efficiency.
Affect personal wealth and the behavior/decisions of business firms.
Financial Institutions
Provide access to financial markets, collect information, and provide services.
Financial intermediary: helps move funds from savers to investors.
Central Banks
Monitor financial institutions and stabilize the economy.
Regulatory Agencies
Provide oversight for the financial system.
2) Five core principles of finance
Time has value.
Risk requires compensation.
Information is the basis for decisions.
Markets determine prices and allocate resources.
Stability improves welfare.
Ch 5 Time Value of Money FIRST MIDTERM8/25 & 8/27 & 9/1
PV/FV, annuities, perpetuities, EAR/APR, and timeline setup.
Match units: if the rate is monthly, then n is months and cash flows are monthly.
2) Single cash flow formulas
FV:FV = PV(1+r)^n
PV:PV = FV/(1+r)^n
n:n = ln(FV/PV)/ln(1+r)
r:r = (FV/PV)^(1/n) − 1
3) Annuities (equal payments)
Ordinary annuity (payments at end): Excel type=0
Annuity due (payments at beginning): Excel type=1
Key Excel:PMT, PV, FV, NPER, RATE
4) Excel TVM functions (ABS if you want positive answers)
Goal
Excel
Typical inputs
Future value
=ABS(FV(rate,nper,pmt,pv,[type]))
rate, nper, pmt, pv
Present value
=ABS(PV(rate,nper,pmt,fv,[type]))
rate, nper, pmt, fv
Payment
=ABS(PMT(rate,nper,pv,fv,[type]))
rate, nper, pv, fv
Rate
=RATE(nper,pmt,pv,fv,[type])
nper, pmt, pv, fv
Number of periods
=NPER(rate,pmt,pv,fv,[type])
rate, pmt, pv, fv
Sign rule: Excel treats money you pay out as negative and money you receive as positive.
If your answer shows up negative, your signs are probably inconsistent (or use ABS() for presentation).
5) APR vs EAR
APR is nominal annual rate. Monthly periodic rate is APR/12.
EAR includes compounding: EAR = (1+APR/m)^m − 1.
Excel:=EFFECT(APR,m) and =NOMINAL(EAR,m)
6) NPV / NFV quick rule
NPV() assumes the first cash flow is at t=1. If there is a time-0 cash flow, add it separately.
Example:=-100 + NPV(0.10,40,40,40)
NFV: compute PV first, then compound: FV(rate,n,0,-PV,0)
Common mistakes:
(1) Using APR as the periodic rate,
(2) mixing months/years,
(3) forgetting type=1 for annuity due,
(4) putting time-0 cash flow inside NPV().
Hands-on Chapter 3 lab: build and analyze an income statement, balance sheet, and cash flow statement using real-company data; connect the statements and calculate free cash flow.
Suppose you already own Apple and want to add another stock.
If Apple and Walmart have a relatively low correlation (assume about 0.11), combining them can reduce portfolio volatility more than combining Apple with another stock that moves very similarly to Apple.
Why Walmart? Different business model / demand drivers can help reduce co-movement.
That does not guarantee higher return, but it can improve the portfolio’s risk-return tradeoff.
Practical idea: Start with the stock you already have (e.g., Apple), then look for a second stock with solid fundamentals and lower correlation rather than just chasing another high-return stock.
7) Systematic vs. unsystematic risk
Unsystematic risk (firm-specific risk): company events (lawsuits, management issues, product failures). This risk can be reduced by diversification.
Systematic risk (market risk): economy-wide risk (interest rates, recessions, inflation, market shocks). This risk cannot be diversified away.
CAPM focuses on systematic risk.
8) Beta (β): the CAPM risk measure
Beta measures systematic (market) risk, not total risk.
β = 1.0: same market sensitivity as the market.
β > 1.0: more sensitive than the market (higher systematic risk).
β < 1.0: less sensitive than the market (lower systematic risk).
β = 0: no market sensitivity (theoretical benchmark).
β < 0: moves opposite the market (rare, but possible for hedging-type assets).
9) CAPM formula (required return)
CAPM:R̂ = Rf + β ( Rm − Rf )
Rf = risk-free rate
Rm = expected market return
(Rm − Rf) = market risk premium (MRP)
R̂ = required return (or cost of equity estimate in many applications)
Interpretation: A higher beta means a larger risk premium above the risk-free rate, so CAPM gives a higher required return.
10) Security Market Line (SML)
The SML is the graph of CAPM required return versus beta.
Y-axis: required return
X-axis: beta
Intercept:Rf
Slope:(Rm − Rf) (market risk premium)
Change
What happens to SML?
Risk-free rate increases (MRP unchanged)
SML shifts upward in parallel (same slope)
Market risk premium increases
SML gets steeper (larger slope)
11) Using the Chapter 6 calculators (JUFinance)
One-Stock Return/Risk Calculator: use for expected return, variance, and SD of a single stock.
Two-Stock Portfolio Calculator: test different weights and correlation assumptions to see diversification effects.
CAPM Calculator: compute required return using risk-free rate, beta, and market return (or market risk premium).
12) Common mistakes (watch these on quizzes/exams)
Using % values incorrectly (e.g., entering 12 instead of 0.12 in formulas/calculators).
Confusing expected return with standard deviation.
Assuming portfolio SD is a simple weighted average.
Forgetting correlation/covariance in two-stock portfolio risk.
Created by Maggie Foley · Jacksonville University Data: S&P 500 from FRED; stocks from the tool linked on the exercise page.
Watch Emma demonstrate each formula, the calculated result, and the final SML graph.
Complete the exercise in three steps
Open the instructions and download the Excel workbook.
Follow the video and reproduce each result in your own spreadsheet.
Check your final answers, save your workbook, and submit it on Blackboard.
Individual work · 5 extra-credit points. Submit your completed Excel workbook on Blackboard. The 5 points will be added to either your first or second midterm exam.
Final Excel checklist (click to expand)
These boxes are a personal review aid; check your own Excel file before submitting.
Ch 7 Bond Valuation
10/13 & 10/15
Bond pricing, yield to maturity, current yield, zero-coupon bonds, and interest-rate risk.
Use the bond calculator and FINRA bond data together
Tip: Use the Bond Calculator
to check price, YTM, and current yield, then compare the result with Excel formulas and real bond data from FINRA.
FIN301 · Chapter 7 · In-Class Exercise
Walmart Bond Lab: From FINRA to Excel
Choose one real Walmart bond. Use the three videos below to explain its cash flows, calculate its price and yield in Excel, and investigate what could happen if interest rates rise tomorrow.
Start here: watch these three videos in order. Then open the exercise instructions below.
Open FINRA Fixed Income Data, search for Walmart, and choose one outstanding, fixed-rate coupon bond with a future maturity date. Analyze that same bond throughout the exercise.
Save a screenshot and record the issuer, CUSIP or bond symbol, annual coupon rate, maturity date, payment frequency, latest available trade price, trade date, and displayed yield. Record the exact yield label (for example, YTM or yield to worst), and note whether the bond is callable. If a field is unavailable, say so rather than guessing.
Price check: If the quote is a percentage of par, a quote of 95.00 means $950 per $1,000 face value. An older trade is not necessarily today's executable market price.
2 · Explain the cash flows
Use $1,000 face value. Calculate the annual coupon and coupon per payment. Draw a timeline showing the purchase price as an outflow at time 0, each coupon as an inflow, and the last coupon plus $1,000 principal at maturity. Label both periods and years.
In two or three sentences, explain what the investor pays today, what the investor receives later, and whether the quoted bond sells at a discount, at par, or at a premium.
3 · Build your Excel model
Create clearly labeled input cells. Let m be payments per year (1 for annual; 2 for semiannual), N the remaining coupon periods, C the coupon per period, and P0 the quoted dollar price per $1,000 face value.
Classroom assumption: Treat today as immediately after a coupon payment. Use a whole number of remaining coupon periods, state your chosen N, and ignore accrued interest, fees, and early redemption. This simplified model may differ from an actual settlement calculation.
Find
Excel formula using named inputs
Coupon per period
=1000*CouponRate/m
Classroom implied annual YTM
=RATE(N,C,-P0,1000)*m
Price check using that YTM
=ABS(PV(YTM/m,N,C,1000))
Current yield
=(C*m)/P0
Use actual cell references or define the names above. Enter rates as percentages in Excel. RATE returns a rate per payment period; multiplying by m gives a nominal annual YTM. Your implied YTM is a classroom result and may differ from FINRA's displayed yield.
Annual versus semiannual: what changes?
For annual payments, use the annual yield, years remaining, and full annual coupon. For semiannual payments, divide the annual yield and annual coupon by 2 and multiply years by 2. In both cases, the rate, number of periods, and coupon must use the same payment interval.
Zero-coupon check: In a copy of your model, set C to zero and keep the same maturity and YTM. Use PV to find the new price. Explain why there are no interim cash inflows and why current yield is zero even though YTM can be positive.
4 · Tomorrow's surprise: the Fed raises rates by 1 percentage point
Predict before calculating: What would you expect to happen to the price of your existing fixed-rate Walmart bond tomorrow? Explain your reasoning using the bond's fixed cash flows and the returns available on competing bonds.
A Fed policy-rate increase does not automatically raise this bond's YTM by the same amount. Expectations, maturity, and credit spreads also matter. For the calculation below, assume your bond's own annual YTM rises by exactly 1 percentage point and everything else stays constant. For example, 5% becomes 6%.
Scenario output
Excel formula
New annual YTM
=YTM+1%
New modeled price, P1
=ABS(PV((YTM+1%)/m,N,C,1000))
Dollar change
=P1-P0
Percentage change
=P1/P0-1
Keep the same coupon, principal, and N for this one-day comparison. Report the original and new prices side by side. Does the result match your prediction? Explain why the coupon payment stays the same while the market price changes.
5 · Make your conclusion clear
Write a short conclusion addressing: How does current yield differ from YTM? Why does a higher required yield reduce the present value of the bond's cash flows? What assumptions prevent your scenario from being a precise forecast of tomorrow's trade price?
What to turn in
Submit one Excel workbook with your FINRA screenshot and source date, bond inputs, labeled cash-flow timeline, visible PV and RATE formulas, current yield, the before-and-after price comparison, and your written explanations. Use all three videos to work through the exercise, and follow the submission instructions provided in class.
Ch 8 Stock Valuation
10/20 & 10/22
Common stock valuation, dividend discount model, constant-growth model, preferred stock, and required return.