Principles of finance syllabus

MGMT S-2000
Principles of Finance

Harvard University Extension School
Summer, 2021

Lectures will be available for viewing in accordance with the schedule in the “Course Calendar”
below.
Professor: Bruce Watson

Teaching Assistants:

Sarah Ledoux (Head TA)

Deals with any issues pertaining to Canvas, course logistics, or course policy
Rob Munger

Sections (On-line and Recorded)
Days and times TBA


SYLLABUS
This course provides an introductory survey of the field of finance. It examines the agents, instruments,
and institutions that make up the financial system of the modern economy, such as bonds, the stock
market, derivatives, and the money market. Along the way, standard concepts and tools of financial
analysis are introduced: present discounted value, option value, and the efficient markets hypothesis.
Recent developments in the field--in particular, the application of psychology to financial markets
(called behavioral finance)--also are discussed. The course is designed to equip students with the
background and tools they need to make their own financial decisions with greater skill and
confidence. Specifically, we will see how insights from academic finance can inform and improve
students’ own investing decisions. The course assumes no prior knowledge of finance or investments.

Prerequisite: High school algebra.
Please note:
This course is part of the Harvard Summer School's Distance Education Program. Lectures for this
term were recorded when this course was given on the Harvard campus during the Fall Term of 2019.
These previously recorded lectures will be posted to the course Canvas site, along with the
accompanying Power Point slides, on the afternoon of the dates listed in the course calendar below.
While the lectures for this course are pre-recorded, other aspects of the course are "live" and are
comparable to those of other Summer School courses (where a lecture is presented twice per week in a
lecture hall at Harvard.) This means that you are responsible for homework and any exams just as you
would be in any other course where you attend weekly lectures in person. Sections will be held each
week as detailed above.


Academic Honesty
Harvard Summer School takes matters of academic honesty very seriously. While you may
discuss assignments with your classmates and others, make sure that any material you submit is your
own work. Use of old course materials, including problem sets or exams from online sources, is
strictly prohibited unless made available to all students by the instructor.
Examples of unacceptable conduct include plagiarism, copying and pasting answers from the internet,
downloading answers to problem sets or exams from other students or the internet, collaborating on
examinations, etc.
Collaboration on problem sets is allowed, even encouraged, but there will be absolutely no allowance
for any collaboration on exams. Any suspected collaboration during an exam, or consultation via text,
email, or the web, will result in a full report to the Administrative Board of the Summer School, with
subsequent investigation and disciplinary action.
You are responsible for understanding Harvard Summer School policies on academic integrity
( Not knowing the rules,
misunderstanding the rules, running out of time, or being overwhelmed with multiple demands are not
acceptable excuses.
To support your learning about academic integrity rules, please visit the Resources to Support

Academic Integrity: ( />where you will find links to the Harvard Guide to Using Sources and two free online 15-minute
tutorials to test your knowledge of academic citation policy. The tutorials are anonymous openlearning tools.

Accessibility
The Summer School is committed to providing an accessible academic community. The Accessibility
Office offers a variety of accommodations and services to students with documented disabilities.
Please visit for more
information.
All accommodations need to go through the Accessibility Services Office. Separate arrangements
for students who approach individual instructors with a disability issue cannot be made.

Course Evaluation
Your constructive assessment of this course plays an indispensable role in shaping education at
Harvard. Upon completing the course, please take time to fill out the online course evaluation.


Course Requirements
Exams
There will be two exams for the course, a midterm and a final. Both will be taken on-line on the
course Canvas site.
The midterm will be available on Canvas starting at 6:30 PM (US Eastern Time) on Thursday, July 15.
Students will have a 24-hour window, from 6:30 PM (US Eastern Time) on Thursday, July 15 to 6:30
PM (US Eastern Time) on Friday, July 16, in which to complete the exam. The exam is one hour long,
and, once begun, must be taken in one sitting. It cannot be partially finished, saved, and then
completed later.
The midterm will cover all the material presented in lecture from the first lecture, posted on June 21, to
the lecture on bonds, posted on July 8.
The final will be available on Canvas starting at 6:30 PM (US Eastern Time) on Thursday, Aug. 5.
Students will have a 24-hour window, from 6:30 PM (US Eastern Time) on Thursday, Aug. 5 to 6:30
PM (US Eastern Time) on Friday, Aug. 6, in which to complete the exam. The exam is two hours long,

and, once begun, must be taken in one sitting. It cannot be partially finished, saved, and then
completed later.
The final will be cumulative, and cover all the material presented in lectures, from the first lecture
posted on June 21 to the last lecture on futures, posted on July 30. However, it will be weighted
toward material presented since the midterm.
Detailed instructions on both exams will be sent to students well in advance of the exam dates.

Please Note:


It is your responsibility to plan your summer schedule, and especially any travel, around exam
dates. In particular, the date of the final exam is determined by the Registrar and cannot be
changed for any reason. Requests to take the final on a different day, including requests for a
make-up final, involve a formal appeal process through the Summer School Examination
Committee.



No makeup midterms will be given.



Please see the section below on “Grading” to understand how your semester grade will be
determined if you must miss the midterm for any reason.


Proctorio
In order to assure the integrity of the exams, they will be proctored through software called Proctorio.
The Summer School offers remote proctoring integrated into the course Canvas site, and allows you to
take exams wherever you are most comfortable. There is no need to take the exams in the lecture hall,

and, for distance students, there is no need to hire or pre-schedule an in-person proctor.
Proctorio requires you to use a computer outfitted with an external or built-in webcam and
microphone, Google Chrome browser, and a stable internet connection (LTE hotspots won’t work).
More information about setting up your computer and an opportunity to test Proctorio will be provided
long before the scheduled exams.

Problem Sets
Problem sets will be completed on Canvas, the same on-line platform on which the midterm and final
exams will be taken. Full instructions concerning the Canvas platform will be provided well before the
first problem set is assigned. All students will be assigned to a grader who will grade their problem
sets throughout the semester.
There will be four problem sets assigned during the term. All four problem sets will be available on
Canvas on the dates indicated in the course calendar below. Due dates are also listed in the course
calendar below, and as well as in Canvas.
Problem sets must be completed on Canvas before 11:59 PM, Eastern U.S. time, on the date the
problem set is due. Note: If you live in a different time zone, Canvas will automatically update the
due date and time on all assignments to reflect the date and time in your zone.
We cannot accept late problem sets for any reason. However, to compensate for this policy, the
lowest of their four problem set scores will be dropped from each student’s semester grade calculation.
If you cannot get a set done some week, that can be the set that gets dropped.
Our grading policy is designed with the interests of all students in mind. As a teaching staff, we have
to be fair to those who submit their problem sets on time, often in spite of difficult situations. We drop
the lowest problem set score to offer flexibility to those who encounter situations beyond their control,
or who just had a bad week.
With so many students in so many different circumstances, we have found the best way to be fair to
everyone is to lay these ground rules out well in advance and follow them without exception.


Re-grade Requests
Students can contact the graders with any questions or concerns about how their problem sets or

midterm have been graded. However, you must submit requests for problem set or midterm re-grades
no later than seven days after your work has been returned. In order to allow for a timely and
orderly response to your request, we must adhere to this policy without exception. We cannot respond
to re-grade requests made after these deadlines.
Graduate Project
(Note: This requirement applies only to students registered for graduate credit)
Students registered for graduate credit must submit three 1 – 2 page papers, written on Canvas,
applying what they have learned in class to a relevant news item that they find in the media—
newspapers, magazines, or on-line.
Due dates for the papers are as follows: July 6, July 26, and Aug. 4.

Grading
Your semester grade will be based on the higher of the two following weightings:
30% problem set scores
30% midterm exam
40% final exam

or

30% problem sets
70% final exam

So, if you do poorly on the midterm, or are unable to take it for any reason, your final exam will
automatically be reweighted to be 70% of your semester grade, with the average of your three highest
problem set scores constituting the remaining 30%. We will make these calculations automatically for
each student—you don’t have to “opt in” or “opt out” of one or the other weighting. We will make
certain you receive the highest grade to which you are entitled.
Once we compute your semester weighted average, your letter grade will be determined in two
ways. If there’s any difference in the result, we’ll give you the higher of the two letter grades
which result.



Curve

In the first system, semester letter grades will determined by a curve. The nature of a curve is that your
grade is based on your performance relative to all other students in the class. It does not involve an
“absolute standard,” e.g., 90 – 100 = A, 80 – 90 = B, etc., which you may be used to from some other
courses.
With a curve, your grade is based on your percentile rank in the class, i.e., the percentage of students in
the class who scored below you. If you are in the 60th percentile, for example, that means that 60% of
students had scores equal to or below yours, while 40% of students had scores above yours.
The Curve Used in Assigning Your Letter Grade for the Semester
To determine your semester grade, we will employ the (very generous) curve given below:
Letter Grade

Percentile Rank Range of Letter Grade

A

83rd Percentile – 100th Percentile

A-

63rd Percentile – 83rd Percentile

B+

44th Percentile – 63rd Percentile

B

24th Percentile – 44th Percentile

B-

10th Percentile – 24th Percentile

C+

7th Percentile – 10th Percentile

C

5th Percentile – 7th Percentile

C-

3rd Percentile – 5th Percentile

D

2nd Percentile – 3rd Percentile

E/F

0th Percentile – 2nd Percentile

For example, say that your higher semester weighted average is 82.5%, and that this puts you in the

57th percentile overall. Applying the curve, your semester grade would be a B+.




Absolute Scale

In the second calculation, grades will be determined by the standard curve you may be familiar with
from high school. In this approach, your letter grade is based on your total points as a percentage of
the total possible points for the semester. Here is the scale:


A

93.0%

C+

77.0%

A-

90.0%

C

73.0%

B+

87.0%

C-

70.0%

B

83.0%

D

65.0%

B-

80.0%

E/F

0.0%

Extending the example above, if your higher weighted average for the semester were 82.5%, according
to the absolute scale, your semester grade would be a B-.
Since the curve results in a letter grade of B+, but the absolute scale results in a grade of B-, the grade
reported to the registrar would be B+, the higher of the two.
Note for graduate students: Your semester grade, as calculated above, will be lowered by half a letter
grade for each of the three graduate papers that you do not submit. For example, if you fail to submit
one of the papers, your grade in the example above would be lowered from a B+ to a B.

Readings
Most of the readings listed in the Course Calendar below are from the textbook: Financial Markets
and Institutions, 9th edition, by Frederic Mishkin and Stanley Eakins.
However—PLEASE NOTE: The book is not required!!


You will find that I don’t follow it closely at all. Many students have done perfectly well in the class
without ever buying the book. Others find it useful to reinforce material we have covered, or to extend
their knowledge of various subjects.
Some of the topics we cover do not appear in the book. Conversely, some of the reading listed below
is for background, and will not be covered explicitly in class.
You should consider the textbook to be most useful as a reference, or as an additional source of review
for material we have presented in class. You will not be responsible—on problem sets or exams—
for material in the book that we have not covered in class.
If you have purchased the 8th edition, the international edition, or a used copy of an even earlier edition
of Mishkin and Eakins, you should still find it useful. However, the page numbers given below refer to
the latest, 9th, edition.
Relevant newspaper and magazine articles will also be placed on the “Readings” page of the course
web site when relevant.

Student Profiles
Every summer, the course enrolls people from an amazing variety of backgrounds and walks of life.
And, the reasons for taking the class are almost as diverse as students’ backgrounds. In order to share a
little of their life stories with their classmates, students are encouraged to submit a few lines about
themselves to the “Student Profiles” discussion board on the course website.
Please note that this is completely voluntary, and also that the only people who will be able to view
what you submit will be your classmates and the teaching staff—nobody else. Just submit a few
lines about your job, background, interests, and/or why you have decided to study finance.
Even if you decide not to submit a profile, you will enjoy reading about some of your fellow students.

(NOTE: These lectures were originally recorded in the Fall, 2019 semester.
While the topics and overall course organization will be the same, please ignore
any references to specific dates. Go entirely by the lecture posting, problem set,
and exam dates given in this course calendar.)

COURSE CALENDAR
Mon., June 21

The Big Picture! Finance in Our Lives
Where do companies get the funds they need to grow, finance new projects,
buy new equipment or expand into new markets?
Introduction and Overview
Functions of Financial Markets: What Do Financial Markets Do, and How Do They
Do It?
Where Do Companies Get Funds?
Mishkin and Eakins:

Chap. 1

Problem Set 0 Available on the Course Web Site
Thurs., June 24 The Most Basic Financial Asset—Money
What Exactly is Money?? What Is Money, vs. What Money Is
Why Does It Seem Like Banks Are Getting So Much Bigger—But There Are Fewer Of
Them??
Direct vs. Indirect Finance
Financial Intermediation
Primary vs. Secondary Markets
Introduction to Money and Banking
Some Facts About Financial Intermediaries

Some Facts About Banks
Money and Liquidity
Introduction to Bank Accounting
Mishkin and Eakins: Chap. 2


Mon., June 28

Need a Loan? Have a Checking or Savings Account? How Do Banks Work?
How Profitable is Your Bank?
You’ve heard the term “leverage”……but exactly what does it mean?
Where Does Money Come From?? (Probably Not Where You Think!!)
Some Bank Accounting Examples
Bank Capital and Measures of Profitability
The (Potentially) Fatal Temptation: Leverage
The Money Multiplier Process
Change in Total Deposits
Change in the Money Supply
The Reverse Money Multiplier Process
Mishkin and Eakins: Chap. 17
Problem Set 0 Must be Completed by 11:59 PM (Eastern US Time)

Thurs., July 1

The Institution Which Has Enormous Power Over Our Lives:
The United States Federal Reserve System
What Rate Will You Pay on a Mortgage? An Auto Loan? The Answer Has a LOT
to do with the Fed!
Most Americans don’t have the slightest idea how it works—After this class,
you will!!

The Federal Reserve: Structure and Functions
Monetary Policy
Open Market Operations
How OMOs Affect Interest Rates
Basis Points
Real vs. Nominal Interest Rates
Other Tools of the Fed
The Reserve Requirement
Discount Lending
Economic Consequences of Fed Actions
Quantitative Easing
Mishkin and Eakins: pp. 185 – 196
pp. 218 – 229
pp. 48 – 51 (Section titled “The Distinction Between Real and
Nominal Interest Rates”)
Problem Set 1 Available on the Course Web Site


Tues., July 6

After This Class……..
—You’ll understand when a dollar is not worth a dollar
—You’ll Really Understand How to Value a Business
Time Value of Money
Present Discounted Value (PDV)
Net Present Value (NPV)
Using NPV in business and investment valuation
Internal Rate of Return (IRR)
Mishkin and Eakins: pp. 38 – 39 (Section titled “Present Value”)

Thurs., July 8

Bonds might seem kind of abstract and forbidding……..but you may well have
already invested in equivalent instruments! They’re actually quite simple!!
Should you think about buying a bond? How much should you pay for it?
Time Value of Money (Review)
The Bond Market
Corporate Bonds
Treasury Bonds
Municipal Bonds
Risks Relating to Bonds
Basics of Bond Pricing
Components of a Bond
Special Kinds of Bonds
Zero Coupon Bonds
Consols
Mishkin and Eakins: Chap. 12
pp. 43 – 47 (on “Coupon Bond” and “Perpetuity”)
Problem Set 1 Must be Completed by 11:59 PM (Eastern US Time)
Problem Set 2 Available on the Course Web Site

Wed., July 14

Problem Set 2 Must be Completed by 11:59 PM (Eastern US Time)
[Note: PS 2 is due on Wednesday instead of Thursday to give you a chance to
review the answers before the exam. The topics on PS 2 will be covered on the
exam.]


Thurs., July 15

(6:30 PM)
to
Fri., July 16
(6:30 PM)
Mon., July 19

Midterm Exam (covering material from June 21 to July 8, inclusive)

So…..finally we get to everybody’s favorite financial market—the stock market
It can make you money and make you feel like a genius……or lose you money, and
leave you feeling like a sucker
It’s endlessly fascinating, treacherous, tempting and terrifying
But, in the next three lectures, we cut through all the hype and jargon to see how the
stock market really works
Introduction to the Stock Market
Stocks vs. Bonds
The Primary Market: How Companies Issue Stocks
Stock Market Jargon: Shares Outstanding, Float, Market Cap
The Initial Public Offering (IPO)
Mishkin and Eakins: pp. 534 – 540
pp. 297 – 302


Wed., July 21

The way that stocks are traded has completely changed in the last 20 years! After
this lecture, you’ll understand the changes and how they affect the market
So much jargon!! This lecture explains the important terms. After tonight, you’ll
never again be intimidated by this stuff!!
Do you have an IRA? A 401K? Then a lot of your savings is probably invested in

mutual funds. But how much do you actually know about how they work? How
do you know if a fund is likely to get you the return you’re looking for?
After tonight’s class, you’re going to be in a better position to answer these questions!
The Secondary Market
Trading Mechanisms and Exchanges
The Rise of Electronic Trading
ECNs
Innovations in Trading
High-Frequency Trading
Dark Pools
Some Market Jargon Explained
Mutual Funds
The Different Kinds of Funds
Structure, Advantages and Disadvantages
Net Asset Value (NAV)
ETFs—Exchange Traded Funds
Mishkin and Eakins: Chap. 20
pp. 303 – 304 (Section on ETFs)


Fri., July 23

Hedge funds are often in the news—both for positive and negative reasons! What
are they, and how do they work?
What stocks should you buy?? In this lecture, we review some of the classic ideas.
Your brother-in-law has a tip on a great stock—what should you do? (Hint:
Run Like Hell!!)
This lecture is devoted to helping you avoid the pitfalls that so many investors
fall into.
Constructing your own portfolio

The Role of Diversification
Risk/Return Trade-off
The Capital Asset Pricing Model (CAPM)
The Two Main Approaches to Trading: Fundamental and Technical Analysis
Arbitrage and the Efficient Markets Hypothesis (EMH)
Stock Price as Expected Value
Three Forms of EMH
Evidence for and Against Market Efficiency
Behavioral Finance and Deviations from Rationality
Implications for Your Investing
Mishkin and Eakins: Chap. 6
“Are Markets Efficient? Yes, Even If They Make Errors,” The Wall Street Journal,
December 28, 2000
“Are Markets Efficient? No, Arbitrage is Inherently Risky,” The Wall Street Journal,
December 28, 2000
“Efficiency and beyond,” The Economist, July 16, 2009
“The grand illusion,” The Economist, March 5, 2009
Jack Naudi, “Faulty Logic,” St. Louis Post Dispatch, January 8, 2006
Problem Set 3 Available on the Course Web Site


Mon., July 26

Options…..ever heard of them? If so, you probably thought that it’s not a
market you would ever get involved in—just waaaay too risky and hard
to understand
But……after the next two lectures, not only will you understand them, you’ll
see how you can actually use options to reduce risk!
Introduction to Derivatives
Options

Calls
Pricing a Call
Intrinsic vs. Time Value of a Call
Hockey Stick Diagrams for a Call
Puts
Pricing a Put
Intrinsic vs. Time Value of a Put
Hockey Stick Diagrams for a Put
Pricing Calls and Puts
The Role of Leverage
Mishkin and Eakins: pp. 594 – 599
“Future Perfect,” The Economist, Nov. 25, 1999

Wed., July 28

Ever heard of a way to make money whether the market goes up or down? You
will in tonight’s lecture!
Calls and Puts (Review)
Hedging Your Stock Portfolio with Options
Hockey Stick Diagrams (Review)
Option Strategies
Spreads
Straddles
Strangles


Fri., July 30

The futures market is another popular derivatives market. Risky? Oh Yeah!
But, they can also be insanely profitable.

After this lecture, don’t order the Mercedes, but at least you will have a better
idea of what futures contracts are, and whether you should ever consider
getting involved.
Futures Contracts
Futures vs. Options
Futures Trading Mechanics
The Mechanics of Stock Index Futures
Video: “Trillion Dollar Bet”
Mishkin and Eakins:

pp. 582 – 593

Chicago Mercantile Exchange, “Introduction to Futures and Options,” Chaps. 1 – 5
(for background information only—as your time and interest permit)
Problem Set 3 Must be Completed by 11:59 PM (Eastern US Time)
Problem Set 4 Available on the Course Web Site
Mon., Aug. 2

Review Session

Wed., Aug. 4

Problem Set 4 Must be Completed by 11:59 PM (Eastern US Time)

Thurs., Aug. 5
(6:30 PM)
to
Fri., Aug. 6
(6:30 PM)

Final Exam (Cumulative—covers all material from June 21 to July 30,
inclusive, but weighted toward material covered since midterm)