1. Financial Markets Prof. André Farber SOLVAY BUSINESS SCHOOL UNIVERSITÉ LIBRE DE BRUXELLES Saigon, April 2004

2. A.Farber Vietnam 2004 |2|2 What did we learned together? Monday: Bond valuation Bond prices and interest rates: duration Asset Liability Management Term structure of interest rates Tuesday: Stock valuation – dividend discount model How to calculate g : Return on Retained Earnings and Retention Ratio Net Present Value of Growth Opportunities Wednesday: Company valuation – free cash flow model Capital budgeting with inflation Introduction to risk, random variables, expected returns, standard deviation

3. A.Farber Vietnam 2004 |3|3..and more.. Thursday Using the normal distribution – confidence interval, Value at Risk Market efficiency: stock prices are unpredictable Asset allocation between 1 risk-free asset and 1 risky asset Friday Diversification and the importance of covariance / correlation Choosing an optimal portfolio CAPM: the optimal portfolio is the market portfolio Beta Saturday The risk expected return relationship Capital structure and the cost of capital Introduction to options

4. A.Farber Vietnam 2004 |4|4 How to prepare the exam 3 hours 5 questions, each 4 questions Some easy, some more challenging Formula sheet with exam + present value tables Past exams are on my website

5. A.Farber Vietnam 2004 |5|5 Review my slides Make sure that you understand Don’t be afraid by formulas Try to understand what they mean – many can be expressed in Vietnamese Use the Excel files to get a better understanding of the calculations Bond valuation ALM and duration Electraviet: stock valuation and NPVGO Stock market – Monte Carlo simulation – discrete distribution Using the normal distribution: Normal distribution and value at risk Efficient set calculation – 2 risky assets Option pricing: 1-period binomial model

6. A.Farber Vietnam 2004 |6|6 Use the book Chap 4.4: Net Present Value : Simplifications Chap 5: How to Value Bonds and Stocks Chap 25.5 (4th ed. 24.5) Duration Hedging Chap 7.3 Inflation and Capital Budgeting Chap 9: Capital Market Theory: An Overview Chap 10: Return and Risk: The Capital-Asset-Pricing Model Chap 12: Risk, Cost of Capital and Capital Budgeting Chap 13: Corporate-Financing-Decisions and Efficient Capital Markets (13.1 to 13.3) Chap 22: Options and Corporate Finance: Basic Concepts

7. A.Farber Vietnam 2004 |7|7 Practice 54 short questions in the book. Work them out. Solutions are on my website Present value5 Bonds7 Stocks valuation 9 Investment decisions4 Risk and Return19 Cost of capital with debt2 Options 8 Total54

8. A.Farber Vietnam 2004 |8|8 Practice even more Short cases Past exams