FIN 310 Class Web Page, Fall '15

Instructor: Maggie Foley

Jacksonville University

The Syllabus

Term Project  

Weekly SCHEDULE, LINKS, FILES and Questions   


Coverage, HW, Supplements

-        Required

WSJ Papers for Discussion in class  

Videos (optional)


Chapter 1 Introduction of the Financial Market

Capital flow chart

Introduction to Capital Markets - ION Open Courseware (Video)

How the stock market works (video)





Flow of funds describes the financial assets flowing from various sectors through financial intermediaries for the purpose of buying physical or financial assets.

*** Household, non-financial business, and our government


Financial institutions facilitate exchanges of funds and financial products.

*** Building blocks of a financial system. Passing and transforming funds and risks during transactions.

*** Buy and sell, receive and deliver, and create and underwrite financial products.

*** The transferring of funds and risk is thus created. Capital utilization for individual and for the whole economy is thus enhanced.



Fall of Lehman Brother part i


Fall of Lehman Brother part ii


Fall of Lehman Brother part iii


Fall of Lehman Brother part iv


Fall of Lehman Brother part v


Fall of Lehman Brother part vi


Chapter 1

Chapter 1 An Introduction to Money and the Financial System


1.      What are the six parts of the financial markets

2.      What are the five core principals of finance

3.      What is stock?

4.      Why do we need stock exchanges?



Guarantee and settlement


5.      What is high frequency trading? pros and cons



Watch high-speed trading in action

High frequency trading (


Chapter 1 supplement I – Behavior Finance and Introduction of Trading


Behavior Finance PPT                                

The following videos will help you to understand how your mind works

NBR | Behavioral Finance Basics | Your Mind and Your Money

NBR | Following the Crowd | Your Mind and Your Money | PBS

NBR | Investor Overconfidence | Your Mind and Your Money | PBS

NBR | Perception vs. Reality | Your Mind and Your Money | PBS

NBR | Report: Framing | Your Mind and Your Money | PBS


Explain the following concepts with one example 

1. What is mental accounting.

2. What is gambler fallacy

3. What is prospect theory

4. What is herding

5. What is anchoring

Chapter 1 supplement II–Introduction of Trading

Stock screening tools

Reuters stock screener to help select stocks



Zack Recommendation of stocks (Daily)



Summary of stock screening rules from class discussion


PE<15  (? FB’s PE>100?)

Growth rate<20


Analyst ranking: strong buy only

Zacks average =1 (from Ranking stocks using PEG ratio)

current price>5



MSN Money

You can find analyst rating from MSN money

For instance,


Zacks average brokerage recommendation is Moderate Buy






Strong Buy





Moderate Buy










Moderate Sell





Strong Sell





Mean Rec.








Homework of the 2nd week (due on 9/10):

1.      What is high frequency trading (HFT)? Shall SEC ban HFT?

2.      How are stock prices determined, in your opinion?

3.      What is your trading strategy?

4.      What is mental accounting, gambler fallacy, herding, anchoring?


Historic Profits for High-Frequency Trading Firm

‘Our firm is made for this kind of market,’ Virtu Financial CEO says

Questions for discussion in class:

1)       What is high frequency trading? What is flash order?

2)       Can you compete with them?

3)       How difficult to set up a high frequency firm?

4)       What is future market? What is CBOE? Why future?

5)       Why international market?

6)       Regulators have been shunning away. Should they? Should regulators step in instead?




Flash Crash' a Perfect Storm for Markets

A complex cast of characters – including the European debt crisis, high-frequency traders, a big mutual fund and allegedly a London-based day trader – led markets to swing violently on May 6, 2010.

Questions for discussion in class:

1)       How did it start?

2)       Why trying in future market can cause flash crash in the stock market?

3) What is E-mini? What is spoofing attack?

4) What is your take away?


Former Goldman Programmer Found Guilty of Code Theft

Questions for discussion in class:

1. No doubt. He is guilty. Do you agree?


Quants: The Alchemists of Wall Street - A Documentary about algorythmic trading





The Great HFT Debate With Michael Lewis On CNBC







The Billion Dollar Secret


The Zacks Rank Guide to Trading Success



Chapter 2

Chapter 2 What is Money



Part I What is Money?  

·         There is no single "correct" measure of the money supply: instead, there are several measures, classified along a spectrum or continuum between narrow and broad monetary aggregates.

         Narrow measures include only the most liquid assets, the ones most easily used to spend (currency, checkable deposits). Broader measures add less liquid types of assets (certificates of deposit, etc.)


Type of money






Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions) (currency) 

Notes and coins in bank vaults (Vault cash)

Federal Reserve Bank credit (required reserves and excess reserves not physically present in banks)

Traveler’s checks of non-bank issuers

Demand deposits

Other checkable deposits (OCDs)

Savings deposits

Time deposits less than $100,000 and money market deposit accounts for individuals

Large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets

All money market funds

·         M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money.

·         MB: is referred to as the monetary base or total currency.  This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply.

·         M1: Bank reserves are not included in M1. (M1 and Components @ Fed St. Louise website)

·         M2: Represents M1 and "close substitutes" for M1. M2 is a broader classification of money than M1. M2 is a key economic indicator used to forecast inflation. (M2 and components @ Fed St. Louise website)

·         M3: M2 plus large and long-term deposits. Since 2006, M3 is no longer published by the US central bank. However, there are still estimates produced by various private institutions. (M3 and components at Fed St. Louise website)





Questions for discussion:

Which measure of money is correct?

Why M2 is >> M0?


Let’s watch this video of Money supply of M0, M1, and M2.


A Few Things the Fed Has Done Right (WSJ, by Dr. Cochrane)

(We will debate on a few topics as suggested below, plus other topics if you have any):

1.      How big is Fed’s balance sheet? Any concerns to you?

2.      Fed pays interest on bank reserves. Good or bad? Why?

3.      Can Fed stabilize the financial market by paying interests on reserves? Why do banks keep excess reserves with Fed instead of lending them out to consumers?

4.      Is hyperinflation or deflation a concern here to the author? But reserves (both required and excess) are not counted in M1, M2, M3. What do you think?

Part II What is Fractional Banking System?


Money Creation in a Fractional Reserve Banking System

In a fractional reserve banking system, banks create money when they make loans. 

Bank reserves have a multiplier effect on the money supply.


Example: You deposited $1,000 in a local bank




Iteration #





Available to Lend


Lends to

1. A







2. B







3. C







4. D







And the cycle continues…




Iteration #

Deposited by

Amount Held


Total Amount that

Total Amount that

Total Amount

Total Amount that


in Reserve


“Can” be

Has Been

Held in Reserve

Customers Believe


from Deposit

Available to

Lent Out

Lent Out


They Have



Lend Out







from Deposit























































































Part III Virtue Currency – Bitcoin  (reading material required)

Ppt1_required        ppt2_FYI_only

Video by Khan Academy




Supply of Bitcoin



Homework of chapter 2 (due on 9/24)

1.      Write down the definition of M0, M1, M2 and M3.

2.      From Fed St. Louis website, find the charts of M1 money stock and M2 money stock.

3.      Compare the two charts and discuss the differences between the two charts. 

4.      Imagine that you deposited $5,000 in Bank A. Imagine that the fractional banking system is fully functioning. After five cycles, what is the amount that has been deposited and what is the total amount that has been lent out?

5.      What is bitcoin? How is bitcoin mined? Why do not you dig one it out? 

6.      What determines the value of bitcoin? What is the future of bitcoin in your opinion?



A Few Things the Fed Has Done Right (WSJ)

(We will debate on a few topics as suggested below):

5.      How big is Fed’s balance sheet? Any concerns to you?

6.      Fed pays interest on bank reserves. Good or bad? Why?

7.      Can Fed stabilize the financial market by paying interests on reserves? Why do banks keep excess reserves with Fed instead of lending them out to consumers?

8.      Is hyperinflation or deflation a concern here to the author? What do you think?





China Central Bank Checks Europe Playbook on Credit (WSJ FYI only not required)

PBOC cuts banks’ reserve ratio by one percentage point while weighing new strategy


The central bank’s one-percentage-point cut in the reserve requirement, announced Sunday, was the second reduction in less than a quarter and the biggest since December 2008, freeing up about $200 billion for banks to lend.”




















How Future Bitcoin Can Prevent a Future Greece

The digital currency is at a turning point, evolving much more quickly than some observers realize



1.      What is the future of bitcoin in the eyes of professionals?

2.      What is your opinion?













































































Draw Me The Economy: Money Supply






Milton Friedman on Inflation and Money Supply


9/17: Guest Speaker “How did I last so long in Wall Street?” by Mr. Peluso.



Mark your calendar:

Visit Fed Jax  at 1:30pm on either 10/22 or 10/27





 Chapter 3

Chapter 3 Financial Market



University: Four Markets



Part I: Order types

Order types (market, limit, stop), video

Understanding order types by wall street survivor, video

Understanding Stock Orders that you can enter

1.       Market order:  A market order instructs your broker to buy or sell the stock immediately at the prevailing price, whatever that may be.


2.       Limit order:  Limit orders instruct your broker to buy or sell a stock at a particular price. The purchase or sale will not happen unless you get your price.


3.       Stop loss order:  A stop loss order gives your broker a price trigger that protects you from a big drop in a stock.



Let's say XYZ's current ask price is 53. You place an order to buy at a limit price of 50. If the price of the security falls to 50, your order may be executed. If you had placed a limit order to buy at 53 or above, your order would have been "marketable" and executed right away.


In Class Exercise part I   


Multiple Choices

1.   A trading order that immediately purchases stock at the prevailing price is called a:

a.   stop-loss order

b.   limit order.

         c.   market order.

 (DEFINITION of 'Stop-Loss Order': An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor’s loss on a position in a security. Although most investors associate a stop-loss order only with a long position, it can also be used for a short position, in which case the security would be bought if it trades above a defined price. A stop-loss order takes the emotion out of trading decisions and can be especially handy when one is on vacation or cannot watch his/her position. However, execution is not guaranteed, particularly in situations where trading in the stock is halted or gaps down (or up) in price. Also known as a “stop order” or “stop-market order.”) video: )

2.   A trading order that immediately purchases stock or is completely cancelled is called a:

a.    stop-loss order.

        b.    fill-or-kill limit order.

b.    market order.

d.    open order.

(DEFINITION of 'Fill Or Kill - FOK': A type of time-in-force designation used in securities trading that instructs a brokerage to execute a transaction immediately and completely or not at all. This type of order is most likely to be used by active traders and is usually for a large quantity of stock. The order must be filled in its entirety or canceled (killed). The purpose of a fill or kill order is to ensure that a position is entered at a desired price.)

3.         A  trading order that is canceled unless executed within a designated time period is called a

a.    stop-loss order.

b.    limit order.

c.    market order.

        d.    none of these.


4.     Limit orders:

a.    specify a certain price at which a market order takes effect.

        b.    specify a particular price to be met or bettered.

c.    are executed at the best price available.

d.    are orders entered for a particular day.


5.     A market order is an instruction to:

        a)a)    immediately buy a security at the current bid price. 

b)b)    buy if the market price at least reaches the specified price target.

c)c)    sell at or above a specified price target.

        d)d)    none of these.



Part II: IPO, SEO, Primary Market and Secondary Market

1.      What is IPO? SEO? Who are the participants?

2.      What is primary market? What is secondary market? Who are the participants?


Next Week (9/28 – 10/2) • 10 Total

Company Name

Proposed Symbol


Price Range


Week Of




$6.00 - $7.00



Edge Therapeutics



$14.00 - $16.00



Fuling Global



$5.00 - $7.00



Mirna Therapeutics



$13.00 - $15.00






$26.00 - $29.00



Performance Food Group



$22.00 - $25.00



Sole Elite Group



$10.00 - $12.00



Strongbridge Biopharma






Surgery Partners



$23.00 - $26.00



SynCardia Systems



$10.00 - $12.00




In Class Exercise part II   


Multiple Choices

1.     The market for equities is predominantly a:

a.    primary market.

b.    market dominated by individual investors.

        c.    secondary market.

d.    market dominated by foreign investors.


2.     Primary markets:

a.    involve the organized trading of outstanding securities on exchanges.

b.    involve the organized trading of outstanding securities in the over-the-counter market.

c.    involve the organized trading of outstanding securities on exchanges and over-the-counter markets.

        d.    are where new issues (IPOs) are sold by corporations to raise new capital.



Homework (due on 10/1)



Company Description

Markets a wearable electric field device for treating glioblastoma brain cancer.

Filing Information

File Date


File Shares


Low Price Range


High Price Range


Proposed Offering Amount




Underwriter Information

Joint Bookrunner

J.P. Morgan

Joint Bookrunner

Deutsche Bank

Joint Bookrunner

Evercore Partners



How does the IPO of NovoCure get professionally valued?


How 'Hide Not Slide' Orders Work





Sept. 18, 2012 10:40 p.m. ET

A basic principle of U.S. stock exchanges is that the first investor to place an order at the best current price generally should be the one whose order is filled first.

But critics say high-frequency traders can jump ahead in line via special order types, like "Hide Not Slide." Here's how it works.

Say an order to buy Microsoft Corp. for up to $30.01 a share is sent to electronic stock exchange Direct Edge Holdings LLC, with instructions to be filled only there and not routed elsewhere.


Meanwhile, though there is no matching sell order on Direct Edge, another market, such as Nasdaq, has an order to sell Microsoft at $30.01. It is also an order to be filled only on that exchange.

The SEC considers this a "locked market" and doesn't allow it. The fear is it could encourage manipulation such as buying and selling a stock merely to generate fees. The ban means an order to buy for $30.01 can't be displayed on Direct Edge. The order will "slide" to a lower price, $30.

Here's where Hide Not Slide orders can take advantage. They are hidden from other investors—not displayed on the exchange's order book.

The locked-markets ban applies only to displayed orders. So if a $30.01 Hide Not Slide order is placed now, it won't slide to a lower price.

When the market "unlocks"—such as if the sell order on Nasdaq is filled or canceled—the Hide Not Slide order is converted back to a displayed order at $30.01 and is eligible to trade against Microsoft shares posted for sale on Direct Edge at that price.

As for the first investor's order—the one that slid to $30—it converts back to the original $30.01 price, but is placed in line behind the Hide Not Slide order. If a $30.01 sell order for Microsoft enters Direct Edge, the Hide Not Slide order will get it first.

If not many Microsoft shares are offered for sale on Direct Edge at $30.01, the first investor may not get any.

The SEC, though it cleared this order type, is examining disclosures and whether, in practice, its use violates the rule that the first order placed at the best current price must be filled first.

Defenders of this order type—variations of which are provided by other exchanges—say that since the hidden order offered a better price during the locked market, it should get priority. Direct Edge declined to comment on the functioning of its order types or the investigation.

Exchanges generally say they make proper disclosures about order types and offer them to all investors. In practice, only those using computers and algorithms can use the arcane ones.


Wall Street trader's NYSE Trading Floor Tour



NASDAQ on AWS - Customer Success Story



CBOT Trading Soybean market pit trading



MGEX - The final minute of trading in the pits, forever.



Ira, Fixed Income Capital Markets, BNP Paribas CIB, New York



Oct 1st, Thursday, first mid term


First Mid Term Study Guide


1.                  What is high frequency trading?  Who are the major players in high frequency trading? What can they gain from high frequency trading? 

2.                  As an ordinary player, can you become a frequency trader?  Why or why not?

3.                  SEC has banned investment banks from participating in any activities associated with high frequency trading via Dodd Frank Act. Do you agree with the SEC? Why or why not?

4.                  Using one example to explain what is mental accounting.

5.                  Using one example to explain what is gambler fallacy

6.                  Using one example to explain what is prospect theory

7.                  Using one example to explain what is herding

8.                  Using one example to explain what anchoring

9.                  Using one example to explain what over confidence

10.              Fed has adopted rules such as paying interest on bank reserves to stimulate the economy.

Why has the Fed made such drastic changes? 

11.              Can Fed stabilize the financial market by paying interests on reserves? Why do banks keep excess reserves with Fed instead of lending them out to consumers?

12.              In a fractional reserve banking system, banks create money when they make loans. Bank reserves have a multiplier effect on the money supply. Image you are going to deposit $100 in Wells Fargo. Explain how much money has been created after four cycles.

13.              Explain what are M0, M1, M2, and M3.

14.              What is bitcoin? How is bitcoin mined?   What determines the value of bitcoin?

15.              Compare market order, limit order, and stop loss order.

17-20      Multiple choice questions about the order types.

21.  What is IPO? What is SEO?

22.  How does an IPO get valued?

23.  What is primary market? What is secondary market?

24.  Questions from WSJ papers assigned for reading.


Chapter 4

Chapter 4: Future value, Present Value, and Interest Rate


This is a $1000 Face Value 50-yr, 3½% coupon bond issued on May 1, 1945. 







Example1: A 5 year, 5% coupon bond, currently provides an annual return of 3%. Calculate the price of the bond.

Example 2: Your cousin is entering medical school next fall and asks you for financial help. He needs $65,000 each year for the first two years. After that, he is in residency for two years and will be able to pay you back $10,000 each year. Then he graduates and becomes a fully qualified doctor, and will be able to pay you $40,000 each year. He promises to pay you $40,000 for 5 years after he graduates. Are you taking a financial loss or gain by helping him out? Assume that the interest rate is 5% and that there is no risk.

Example 3: You are awarded $500,000 in a lawsuit, payable immediately. The defendant makes a counteroffer of $50,000 per year for the first three years, starting at the end of the first year, followed by $60,000 per year for the next 10 years. Should you accept the offer if the discount rate is 12%? How about if the discount rate is 8%?

Example 4: John is 30 years old at the beginning of the new millennium and is thinking about getting an MBA. John is currently making $40,000 per year and expects the same for the remainder of his working years (until age 65). I f he goes to a business school, he gives up his income for two years and, in addition, pays $20,000 per year for tuition. In return, John expects an increase in his salary after his MBA is completed. Suppose that the post-graduation salary increases at a 5% per year and that the discount rate is 8%. What is miminum expected starting salary after graduation that makes going to a business school a positive-NPV investment for John? For simplicity, assume that all cash flows occur at the end of each year


Homework (just write down the PV equations):

1. The Thailand Co. is considering the purchase of some new equipment. The quote consists of a quarterly payment of $4,740 for 10 years at 6.5 percent interest. What is the purchase price of the equipment? ($138,617.88)

2. The condominium at the beach that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment? ($2,291.89)


3. Today, you are purchasing a 15-year, 8 percent annuity at a cost of $70,000. The annuity will pay annual payments. What is the amount of each payment? ($8,178.07)


4. Shannon wants to have $10,000 in an investment account three years from now. The account will pay 0.4 percent interest per month. If Shannon saves money every month, starting one month from now, how much will she have to save each month? ($258.81)

5. Trevor's Tires is offering a set of 4 premium tires on sale for $450. The credit terms are 24 months at $20 per month. What is the interest rate on this offer? (6.27 percent)

6. Top Quality Investments will pay you $2,000 a year for 25 years in exchange for $19,000 today. What interest rate are you earning on this annuity? (9.42 percent)

7. You have just won the lottery! You can receive $10,000 a year for 8 years or $57,000 as a lump sum payment today. What is the interest rate on the annuity? (8.22 percent)


University: Time Value of Money

Laugh And Learn About Personal Finance -


Funny Moneyman Credit Card Game Show




Chapter 6

Chapter 6 Bond Market


               Chapter 6 PPT


1.      Cash flow of bonds

Introduction to bond investing (video)

How Bonds Work (video)


2.      Risk of Bonds

Bond risk (video)

Bond risk – credit risk (video)

Bond risk – interest rate risk (video)

Bond risk – how to reduce your risk (video)


3.      Choices of investment in bonds


FINRA – Bond market information


Treasury Bond Auction and Market information


Treasury Bond

Corporate Bond

Municipal Bond

International Bond

Bond Mutual Fund





Class discussion Topics


Is there a bond bubble? When will it burst?

Is the bond bubble bursting? (Bloomberg, video)

Robert Shiller Bond Bubble Likely but not crippling




1. Find GOOGLE (Symbol: GOOG)’s bond in FINRA website. Pick one of the three bonds and answer the following questions. (, and search for GOOGLE bond)

a.     How to calculate the price?

b.      Why GOOG’s bond yield is lower than MSFT’s?

c.      What does “callable” mean?

d.      Who are the three major rating agencies?

e.      What is the rating of GOOG? Is it better than MSFT’s or are they the same?

2. Explain why Google bond is more risky than the Treasury bond with the same condition.

3. Why is there a concern for bond bubble? As a bond investor, how shall you prevent losses?





The new bond market: Bigger, riskier and more fragile than ever

Stocks rise and fall, but bonds are starting to make people anxious no matter what they do.


How do you explain the following. On April 17, the yield on the bund plunged to an all-time low of 0.05%. Three weeks later, it spiked to 0.786%, without a major news event or apparent broad shift in investor sentiment.”



Robert J. Shiller: "Are We Headed for Another Financial Crisis?" (final edition, as of MAR 8)



Robert Shiller Interview - MoneyWeek

Robert Shiller Interview: why one of the world’s smartest economists is worried about the bond market



Chapter 7

Chapter 7 Rating, Term structure

Chapter 7 Rating Agency, Interest rate risk, yield curve (PPT)

Three Major Rating Agencies

University: Bond rating (video)

Moody’s sovereign rating list

1.      Who are they?

2.      Are they private firms or government agencies?

3.      How do they rank?

4.      Do we need rating agencies and critiques.

5.      S&P credit rating (from S&P website)








An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.


An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.


An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.


An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.


How credit agencies work (video)



Class discussion Topics

How much do you trust those rating agencies?

Are those rating agencies private or public firms?


Rating Conflicts (video)


Yield curve and Term structure

1.     What is yield curve (

2.       What is normal shape of yield curve

3.       What does inverted shape of yield curve tell us?

4.       Market watch on Wall Street Journal has daily yield curve and interest rate information.


Summary of Yield Curve Shapes and Explanations

Normal Yield Curve
When bond investors expect the economy to hum along at normal rates of growth without significant changes in inflation rates or available capital, the yield curve slopes gently upward. In the absence of economic disruptions, investors who risk their money for longer periods expect to get a bigger reward — in the form of higher interest — than those who risk their money for shorter time periods. Thus, as maturities lengthen, interest rates get progressively higher and the curve goes up.



Steep Curve – Economy is improving
Typically the yield on 30-year Treasury bonds is three percentage points above the yield on three-month Treasury bills. When it gets wider than that — and the slope of the yield curve increases sharply — long-term bond holders are sending a message that they think the economy will improve quickly in the future.



Inverted Curve – Recession is coming
At first glance an inverted yield curve seems like a paradox. Why would long-term investors settle for lower yields while short-term investors take so much less risk? The answer is that long-term investors will settle for lower yields now if they think rates — and the economy — are going even lower in the future. They're betting that this is their last chance to lock in rates before the bottom falls out.



Flat or Humped Curve

To become inverted, the yield curve must pass through a period where long-term yields are the same as short-term rates. When that happens the shape will appear to be flat or, more commonly, a little raised in the middle.

Unfortunately, not all flat or humped curves turn into fully inverted curves. Otherwise we'd all get rich plunking our savings down on 30-year bonds the second we saw their yields start falling toward short-term levels.

On the other hand, you shouldn't discount a flat or humped curve just because it doesn't guarantee a coming recession. The odds are still pretty good that economic slowdown and lower interest rates will follow a period of flattening yields.




Class discussion Topics

How does today’s yield curve look like?

What can you learn about the market from the yield curve?

How is the interest rate determined? For example, the yield of 20 year bond issued by Treasury is less than that by Wal-Mart. Meanwhile, GE’s bond with similar maturity condition would be cheaper than that of Wal-Mart. How come?  Which bond sounds more attractive to you?



1.                  Find Moody’s rating of Greece, Ukraine, Germany, and Japan.

2.                  Go to

And explain why Ukraine was downgraded on 9/20/2013. And how does it affect Ukraine government, its residents, bondholder and potential bond buyers. Also, what is the current rating of Ukraine?

3. Go to and answer the following questions.

4.      What is the current shape of US and UK yield curves.

5.      If you plan to apply loans to buy a house, what do you expect the rate to be? Why?

6.      If you plan to invest in an upcoming 5 year Google, what do you expect the rate to be? Why?






An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.





Cracks Emerge in Bond Market

Credit-rating firms are downgrading more U.S. companies than at any other time since financial crisis


2.       Why does S&P downgrade those firms in some industries? Increased borrowing by those firms is one of the reasons. Why do they do so? Are they not afraid of the punishment such as being downgraded by the rating agencies?

3.       The spread between corporate bonds and Treasury bonds has increased. Do you worry about the health of the economy?






How to Understand the Yield Curve


“Bottom line, the only way to prosper in a rising-rate environment by staying short is if rates rise faster than the collective expectation. The yield curve tells us precisely what the expected increase is at any point in time. So, unless you have certain knowledge that the Fed will be raising rates faster than the implied collective expectation (in which case the regulators would dearly like to speak with you), rather than spend your time guessing what the Fed will do and when, invest in a carefully constructed bond ladder that reflects your specific liquidity and risk needs”

 ------- What does the above paragraph mean?




Longer-Dated Government Bonds Rise; Yield Curve Flattens


1.      1. “The yield on the benchmark 10-year Treasury note is used to price a wide range of financing activities including mortgages, corporate bond supply and business loans.”

----- What does the above sentence mean?


2.      2. Investors have been moving money away from shorter-dated Treasury notes and into longer-dated bonds to prepare for the Fed’s tightening cycle, pushing the yield premium to own longer-dated bonds lower.

A shrinking premium is known on Wall Street as a flattening yield curve.

----- What does the above sentence mean?


3.      Many investors don’t expect the 10-year yield to rise sharply, citing a still- moderate pace of U.S. economic growth and contained wage inflation

----- What does the above sentence mean?

Credit Rating Agencies (1/3) - 'Bank Ratings are only Opinions'




Credit Rating Agencies (2/3) - 'Are there Conflicts of Interest




Credit Rating Agencies (3/3) - 'What is your Rating'





Warren Buffett on the Financial & Housing Crisis and Credit Rating Agencies (2010)

Chapter 8

Chapter 8 Stock Market (Thanks, Ashley and Hunter)

ppt (Made by Ashley and Hunter. Thank you!)


Stock screening tools

Reuters stock screener to help select stocks


WSJ stock screen


Stock charts

Simply the Web's Best Financial Charts


How to pick stocks

Capital Asset Pricing Model (CAPM)Explained


Fama French 3 Factor Model Explained

Fama French factors  dataset

Ranking stocks using PEG ratio



10/27 from 1:30-2:30, Visit

Jacksonville Branch - Federal Reserve Bank of Atlanta

Dress Code: Business Casual

Address: 800 Water Street

(904) 632-1000


Chapter 5

Chapter 5 DiversificationPart I Diversification



“Members of a Yale class entering their prime giving years had decided to set up a private fund, manage the money themselves, and give it to the University 25 years later. The worrisome part for Yale was that it would have no control over the fund, which was going to be invested in high-risk securities. What if all the money was blown by these “amateurs"? And what if the scheme siphoned off other potential donations?

Happily, everything turned out for the best. Despite Yale’s initial efforts to discourage the Class of 1954 from its plan, the class persisted. And last October, its leaders announced that their original collective investment of $380,000 had grown to $70 million, earning unalloyed gratitude from the University and the right to name two new Science Hill buildings after their class.” ----- What is your opinion? Apple is one of the stocks in their portfolio. So shall you pick stocks individually or buy S&P500?

Shall you diversify or not? Let’s compare AAPL with S&P500.

Stock  returns from 1995-2015 - Apple and S&P 500





Regress Apple’s Return on S&P500’simage024.jpg

Apple and S&P500’s Stand Deviation Comparison


Questions for class discussion:

Which one is better, the S&P500 or Apple? In the past? About the future?

How to find the next Apple?


Chapter 5 Part II – Mutual Funds and ETF

Optimally diversified portfolio

1.      image032.jpg


3.      image029.jpg


4.Mutual fund vs. ETF

5.   Mutual fund ppt





ETF trading (Video)

Dark Side of ETFs CNBC (Video)

ETF Investing Strategies (Video)


Examples of ETF: Powershares (QQQ) – NASDAQ 100 Index (Large-cap growth stocks)

QQQE: Nasdaq-100 Equal Weighted Index Shares ETF (Video)


QQQ is rebalanced quarterly and reconstituted annually

Average Volume: 36.1 million

Expenses: 0.20%

12-Month Yield: 1.00%

Sector Weightings (top 5):

Information Technology 54.47%; Healthcare 14.62%; Consumer Cyclical: 13.26%; Consumer Defensive: 6.89%; Communication Services: 6.62%

Market-Cap Allocations:

Large-cap growth: 62.86%; large-cap blend: 20.53%; large-cap value: 7.38%; mid-cap growth: 4.57%; mid-cap blend: 2.98%; mid-cap value: 1.69%

Top 5 Holdings:

Apple Inc. (AAPL): 14.53%

Microsoft Corp. (MSFT): 6.79%

Google Inc. (GOOG): 3.80%

Facebook Inc. (FB): 3.73%, Inc. (AMZN): 3.73%


1-Year: 21.63%

3-Year: 17.10%

5-Year: 18.29%

10-Year: 12.07%

15-Year: -0.19%

Dividend yield

       0.74% dividend on yearly basis


What Apple’s Stock Split Means for You


Apple Sales, Profit Surge in China


Ten Biggest U.S. Equity Market ETFs 



The largest and the oldest ETF is SPY issued by State Street, a fund that falls under the large cap blend category. With total assets of $98.3 billion, the fund is far and away the biggest ETF listed in the U.S., beating out the next biggest fund by $30 billion.

SPY tracks the S&P 500 Index, which is a free-float capitalization-weighted benchmark that focuses on 500 of the largest companies that are based and listed on American exchanges.  In order to accomplish this task, the ETF uses a full replication technique, holding each and every stock in the underlying index. The fund puts only 20.45% of its assets in top ten holdings, which includes Apple (NASDAQ:AAPL), Exxon Mobil (NYSE:XOM), Microsoft (NASDAQ:MSFT), and General Electric (NYSE:GE). Technology and financials constitute the top spots in the basket while giant and large cap stocks dominate from a market capitalization perspective.

The product is a low-cost choice in the space with a minimal bid-ask spread, low tracking error and a small fee of nine basis points a year. Trading in good volumes, SPY has generated annual returns of 1.86% and 12.20% in fiscal 2011 and year-to-date, respectively, and yields 1.44% dividend per annum. 


PowerShares QQQ (NASDAQ:QQQ)

The fund is passively managed ETF designed to deliver the return of the US large-cap growth stocks. It seeks to match the price and performance of the NASDAQ-100 index, which includes the largest domestic and international nonfinancial companies based on market capitalization.

The stocks in the NASDAQ-100 index are considered to be the growth stocks because they have higher price-to-book ratios and higher forecasted growth rates. The ETF seeks a full replication strategy, holding all the 100 stocks in NASDAQ-100 index.

The product delivered annual return of 3.46% last year and 22.45% year-to-date. It is the low-cost choice in the space with lower fees of 20 bps, small bid/ask spread and good tracking error. Further, the ETF yields 0.74% dividend on yearly basis which is decent for a high growth, broad market play.

iShares S&P 500 Index Fund (NYSEARCA:IVV)

Launched in May 2000, the fund is a passively managed ETF designed to deliver the return of the US large-cap stocks. With total assets of $29.1 billion, IVV seeks to match the performance and yield of the S&P 500 Index before fees and expenses. The S&P 500 Index is a free-float capitalization-weighted index selected from the wide range of industries for market size, liquidity and industry grouping.

The ETF uses full replication technique, holding 500 stocks in S&P 500 Index. The fund is one of the largest, most traded and well known large cap ETFs on the market today. Much like its counterpart SPY, this product is inexpensive, has a low bid ask spread and has a very small tracking error.  


Total Stock Market ETF (NYSEARCA:VTI)

For the broad diversification across all equity classes, investors should consider Vanguard’s VTI. This fund seeks to replicate the price and yield of the MSCI US Broad Market Index before fees and expenses, holding 3,380 stocks. The fund portfolio is comprised of the entire U.S. stock market, ranging from micro caps to giant firms. It puts a decent amount of assets in the top ten (15%) considering the enormous basket of holdings at its disposal.  

With total assets of $21.0 billion, the fund is one of the largest and most heavily traded, as well as inexpensive compared to the other ETFs in the space with low tracking error and small bid-ask spread.

The fund uses a passive index strategy and charges only seven bps per year in fees from investors. The product has generated higher returns of 13.81% year-to-date and minimal returns of 0.93% last year, however, the yield is decent, coming in at 1.74% per annum.

Russell 1000 Growth (NYSEARCA:IWF)

This fund, issued by iShares, is a passively managed ETF designed to deliver the return of the US large-cap growth stock market. The product tracks the performance of the Russell 1000 Growth index, before fees and expenses.

The Russell 1000 Growth index is capitalization weighted 590 stock subset of Russell 1000 index. The stocks are considered to be the growth stocks because they have higher price-to-book ratios and higher forecast growth rates than their peers in the benchmark.

The fund has a decent concentration ratio, although 29% of its assets do go to the top ten holdings, including Apple, Exxon Mobil, and IBM. Technology, consumer discretionary, and producers durables constitute the top positions in the basket.

With total assets of $15.9 billion and expense ratio of 0.20%, the fund delivered 2.47% and 15.18% returns, respectively, in 2011 and 2012 year-to-date. The product yields dividend of 0.93% per annum.

iShares Russell 2000 Index Fund (NYSEARCA:IWM)

Investors seeking small cap exposure can look to IWM, a popular small cap ETF debuted by iShares in May 2000. This fund is the largest in the small cap equity space with total assets of $14.7 billion tracking the performance of the Russell 2000 Index.

The Russell 2000 Index is a capitalization weighted 200 stocks subset of the Russell 3000 Index. IWM uses a full replication strategy holding all 1,968 stocks in the underlying index while putting only 2.53% of its assets in the top 10 firms. However, the product is heavy on financial and consumer discretionary. 

The fund charges low fees of 26 bps a year and is highly traded and liquid. The fund is performing excellent starting this year as depicted by the 11.11% annual returns year-to-date. However, the returns were not good last year due to the slump in the market. Additionally, the ETF yields an annual dividend of 1.03%, which isn’t too bad considering the growth focus of the fund.

iShares Russell 1000 Value Index Fund (NYSEARCA:IWD)

Another biggest fund available for the large cap exposure in the ETF space is iShares IWD. The fund seeks to match the performance and yield of the Russell 1000 Value Index, which is a capitalization weighted 657 stock subset of the Russell 1000 Index. The group focuses on value stocks which look to have lower PE ratios and lower values for price to book and price to sales ratios.

The ETF is heavily weighted to financials as this takes up the top spot in its basket. Health care and energy firms also receive large allocations, although energy firms do receive a double digit allocation as well.

SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA)

Risk adverse investors seeking to invest in blue chip companies may consider State Street’s DIA. This fund seeks to replicate the price and yield performance of 30 blue-chip U.S. companies as indicated by the Dow Jones Industrial Average. The fund holds 30 stocks with 57% of its assets concentrated in the top 10 companies.

Launched in January 1998, the fund generates descent returns of 8.07% in 2011 and 8.20% year-to-date with impressive dividend yield of 1.86%. The product is another relatively low-cost choice in the space with only 18 bps of fees per year. Additionally, it trades with a good volume, has a low tracking error and a small bid/ask ratio, thanks to its AUM of nearly $11.2 billion. 

Dividend Appreciation ETF (NYSEARCA:VIG)

This fund is appropriate for the income-hungry investors with AUM of $10.87 billion. The fund uses a passive index approach and a full replication strategy, holding 128 stocks that are in the Dividend Achievers Select Index. The fund represents the stocks of companies having a record of growing dividends each year. The fund focuses on quality dividend payers rather than those that pay high yields.

ConocoPhillips, Chevron, Coca-Cola and Exxon Mobil make up the top positions in the basket. From a sector perspective, the fund is highly exposed to consumer staples and industrials, which makes up a combined 50% of assets in the basket.

Initiated in April 2006 by Vanguard, the fund has delivered annual returns of 7.86% year-to-date and annual dividend yield of 1.99%. Trading with good volumes, the product has low expense ratio of 0.24% compared to the category average of 0.36%.

S&P MidCap 400 Index Fund (NYSEARCA:IJH)

Investors seeking mid-cap exposure can look to iShares and their IJH, a product that was launched in May 2000. This fund is the largest mid-cap blend fund with total assets of $10.2 billion under management. The fund seeks to replicate the price and performance of the S&P MidCap 400 Index, before fees and expenses, holding 403 stocks.

Traded in good volumes, the ETF is highly volatile and is the low cost choice for the investors due to its lower expense ratio of 0.20%. The fund generates negative return of 1.89% last year and attractive 14.15% return year-to-date. It also yields annual dividends of 1.12%.

Closed end fund (WSJ paper)

There are two types of mutual funds — open-end funds and closed-end funds. Imagine they’re twins who share the same DNA but go through life doing things very differently.

Both of these funds sell shares to investors and use the money invested to buy securities that match their investment missions. But that’s where the similarities end.

When people say “mutual funds” they’re usually referring to open-end funds. Open-end funds can sell an unlimited number of shares to investors. The price per share — also known as the net asset value (NAV) — is calculated by dividing the market value of the fund’s assets by the number of shares held by investors.

Most people own the open-end variety in their retirement and taxable accounts.

Now let’s look at the lesser-known twin, closed-end funds. These funds issue a set number of shares at the fund’s origin that trade on the stock exchange throughout the day. The value of these shares is based on demand. If lots of investors buy shares, the price goes up. If investors dump them, the price goes down.

The same is true for closed-end funds. If you invest in a closed-end fund with a share price that’s lower than its NAV, congratulations, you’re getting a discount. If the gap between that fund’s share price and its NAV narrows after you invest, you’ll receive a bonus when you sell shares. Just as if the price of that bag of coins went up when you sold it.

But don’t get overly concerned with these figures. Most closed-end funds offer a discount. The key is knowing how much of a discount they’re offering and whether you think the fund will perform well over time. If it does, and the discount shrinks after you’ve purchased shares, then you earn a profit.


Apple Inc (NASDAQ: AAPL) Stock Split: When To Buy Shares




Is Apple stock a buy after the annual Apple event?




August 2015 Closed-End Fund Market Update



September 2015 Closed-End Fund Market Update






Second Midterm (chapter 4-8, Nov 5th)



Chapter 9 Options and Futures



Class discussion topics:

Apple price will go up because of the holiday shopping season. Google price could fall based on some news you just heard. Anticipating large changes in stock prices of Apple and Google, how shall you act?


CBOE free option calculator (great tool to calculate option prices)

Give it a try, using the following inputs. And then give it another try with Google.

Give it a try, using the following inputs. And then give it another try with Google.




Expiration Date: 

Days to Expiration: 

Volatility %: 

Interest Rate%: 

Dividends Date (mm/dd/yy): 

Dividends Amount: 

Dividends Frequency: 

The answers should be as follows.




Option Value: 







And then give it another try with Google.


Delta: The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the "hedge ratio."

Gamma: The rate of change for delta with respect to the underlying asset's price. Gamma is an important measure of the convexity of a derivative's value, in relation to the underlying.

Theta: A measure of the rate of decline in the value of an option due to the passage of time. Theta can also be referred to as the time decay on the value of an option. If everything is held constant, then the option will lose value as time moves closer to the maturity of the option.

Vega: The measurement of an option's sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's price changes in reaction to a 1% change in the volatility of the underlying asset. 


Rho: The rate at which the price of a derivative changes relative to a change in the risk-free rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate.

Call and Put price of AAPL on Google Finance

Call and Put price of AAPL on Nasdaq


Call Options Trading for Beginners in 10 min (video)

Put Options Trading for Beginners in 10 min (video)



Home Work

Use CBOE free option calculator and calculate both call and put option prices.

Interest rate: 1%; volatility 30%; Strike price 110. Current price 120.

Maturity in 30 days.

And then increase strike price to 130, all else equal.  Report the new prices.

And then decrease strike price to 100 and report the prices.



Chapter 10 Foreign Exchange Market



Forex Market basics investopedia video

Forex market is the largest financial market: $1.9 trillion daily. It is too big to be manipulated.

Forex market is a network with over 1000 banks and no one is in charge.


Class discussion topics:

You plan to study in France for one month next summer. The total expense is around €5,000. What shall you do now?

Consider the following factors

1.      Fed will increase interest rates in December.

2.      Falling oil prices

3.      Greece economy does not improve

4.      Banks in Europe are struggling



World value of dollar

Rates of exchange for the U.S. dollar against various currencies. Unless otherwise noted, all rates listed are middle rates of interbank bid and asked quotes. A positive year-to-date change means the dollar has strengthened against this currency so far this year and will purchase more of this currency; a negative figure means it has weakened.


Exchange Rates: New York Closing Snapshot


Bloomberg foreign exchange market rates (on time rate)


Foreign Exchange Market (Cartoon video - history)


How is the currency value determined?


How is the price of a currency determined


Purchasing power parity explained (video)


What is purchasing power parity

The concept is based on the law of one price, where in the absence of transaction costs and official trade barriers, identical goods will have the same price in different markets when the prices are expressed in the same currency.

Purchasing power parity is a real value comparison between two currencies. Purchasing power parity may be used to compare the spending power of two currencies against a basket of related goods, such as groceries. To calculate purchasing power parity, analysts use a ratio derived from the price of goods and compared to the prevailing foreign currency exchange rate.


Simple way to calculate exchange rate -

Big Mac Index Explained (video)

Oct 27, 2015

Options Traders Bet on Apple’s Earnings Providing a Jolt

·                     By SAUMYA VAISHAMPAYAN





Gambling on Derivatives, Hedging Risk or Courting Disaster?