Columbia University

Graduate School of Business

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B6302: Capital Markets and Investments

Summer 2004
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Professor Mikhail Chernov

Office: Uris Hall #413

Phone: 212-854-9009
Fax: 212-316-9180

Email: mikhail.chernov@columbia.edu

Web: http://www.gsb.columbia.edu/faculty/mchernov/b6302.html

Section 001: Mondays and Wednesdays from 1:30 to 3:00 in Uris 142
Section 002: Mondays and Wednesdays from 3:15 to 4:45 in Uris 142
Note: Because of some summer holidays, the class will take place on Friday instead of Monday
or Wednesday. Please check the schedule on the last page and the GSB calendar for details.

Review Sessions: Fridays, 11:45 to 1:15, Uris 303 (Uris 326 on 6/18)

Office hours: Tuesdays, 9:00-11:00

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1. Course Description

This course is an introduction to asset valuation or pricing. The course covers fixed income asset
pricing, investments and portfolio management and options and derivatives.

The goal of this class is twofold. For students not planning on taking advanced finance classes, this
course provides a broad overview of the topics in capital markets that everyone should know. For
those who wish to take advanced courses in finance, it provides a solid foundation.

2. Prerequisites

The prerequisites for this course are knowledge of basic corporate finance concepts (B6301 level),
algebra (exponentials, logarithms, square roots, etc), and probability/statistics (B6014 level).

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3. Course Requirements

The course requires a weekly problem sets, a project, class participation, a midterm exam and a final
exam.

5. Problem Sets

There are 9 problem sets during the semester, of which, you are required to turn in 7 assignments.
You can choose which 7 to turn in and each will be graded on a “√”, “+”, “-“ scale (check, plus, and
minus). The grades are recorded and count toward the final course grade.

If you turn in more than 7 problem sets, the 7 highest scores count. You will receive typed solutions
to each problem set, whether or not you turned it in.

You can work on your own or in groups of up to three people. If working with others turn in one
assignment for the group and be sure to include the names, ID numbers and section of each group
member. You may start working with a group or switch groups at any time during the course.

Homework should be turned in at the end of class on the day it is due. Late homework will not be
accepted under any circumstances. You only need to turn in 7 assignments, so you have a cushion.

6. Equity Project

At the end of the fixed income unit, I will assign an equity project. The goal of the project is play the
role of equity analyst. By the first class of equities, 6/7, each student/group will pick a stock to
follow for the following month (the bulk of the equities section). You may not choose the company
that you used for your IP project. On 7/7, each student/group will turn in a report. The report
should consist of two components. First, how did the stock behave over the previous month? Why
did it move? Second, what are the future prospects for the company? I will be looking for
nonstandard analysis, something more than most Wall Street analysts do: repeating the company’s
own analysis and forecasts.

Each project receives a grade based on depth of analysis on a 1-10 scale. It contributes to your final
course grade. The best 4 analyses (in my judgment) in each class will be chosen to give a 10 minute
presentation in class on 7/12. The presentations will be graded by the class on a 1-10 scale and each
group member will receive that many extra credit points on the final exam.

7. Equity Trading Game

During the equities unit, we will run a trading game from virtualstockexchange.com. Everyone must
participate which means that you must sign up and make both a long and short trade. The rewards
are as follows: if you are in the top ½ of the class, you receive 3 extra credit points on the final; if
you are in the top ¼ of the class, you get 5 extra credit points and if you are in the top 3 in the class,
you receive 10 extra credit points on the final and I will take you along with the other winners out
for dinner.

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8. Class Participation

Students are expected to be prepared for every class and participate in class discussions. This is an
integral part of the course. Students should have completed any assigned reading, have reviewed
previous lectures and be willing to answer, and ask questions during class. In order to make sure that
the concepts are understood, I reserve the right to call on students during class.

Please don’t be shy about asking questions to clarify what we are discussing or to bring a different
perspective. The course is cumulative, so being lost gets very costly very quickly. If I am unclear in
presenting something, others are probably also confused and you will be doing yourself and
classmates a favor by asking for clarification.

You will be graded on class participation in the following manner. Class participation will count for
10 points and everyone receives 5 points to start with. Constructive comments in class will increase
and consistently bad or irrelevant participation will decrease the participation points. For example, a
cell phone ringing in class will subtract 5 points. Negative points are possible!

9. Teaching Assistant and Review Sessions

The teaching assistant for the course is Binu Balachandran (BBalachandran09@gsb.columbia.edu).

Binu will have office hours on Wednesdays, from 5 to 7 pm in the Business Library. Review
sessions will be held on Fridays from 11:45 to 1:15. Please direct all homework related questions to
Binu.

10. Questions and Office Hours

i. You can ask questions by phone, in person or by email. Email is strongly encouraged. I
welcome your feedback on every aspect of the course.

ii. I have an open door policy: you can stop by my office (Uris 413) without an appointment. If
you think that you will need some extended help, please email me to make an appointment
first. I will also be available for questions or comments after each class.

11. Exams

i. There will be two exams, a midterm and final examination.

ii. The midterm exam will be a take home exam administered under the integrity code. The
midterm will be released on Monday June 21st and is due in my office by 5:00 p.m. on
Friday June 25th. Late exams will be penalized by 50% of the grade.
iii. The final exam is a 3-hour in-class exam. You may have with you copies of the lecture notes,
past problems sets and solutions, and any handwritten notes that you have as long as they are
written on your lecture notes, problem sets or exams. No books, copies of book pages or
other documents are allowed. Please be sure to bring a calculator.
iv. Cheating is not tolerated and will be punished with the maximum allowable penalty.
This, for example, could mean expulsion from the GSB.
v. Exam re-grade policy: If points do not add up correctly, please submit your exam to the
TA for immediate correction. Neither Binu, nor I will discuss informally the number of

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 points, or partial credit, assigned on a given question. If you feel that a question was
inaccurately graded, then you must:
a. submit a written explanation detailing what the problem is
b. along with another exam that has substantially the same answer as yours but
received more points on the particular question
c. submit the explanation, your exam and the other exam within ten business days of
receiving the graded exam back. Your entire exam will be re-graded and recall
that there is no guarantee that the initial grade will not be lowered. You will
receive a written note regarding the decision reached.

12. Grading

Your overall course score is given by:

Homework: 10%
Equity Project: 10%
Class Participation: 10%
Midterm Exam: 20%
Final Exam: 50%

13. Administrativia

1) I like to read your resumes, so please give me a copy in class or email one to me.
2) Please use a name-card in class.
3) Handouts will be distributed in class and I will place extra copies outside my office.
4) I don’t intend to be rigid, but I do expect you to show up on time for class. Tardiness is
disruptive to the entire class and repeated tardiness will reduce your participation points.
If you know in advance you will be late, or have to leave early, please let me know, and I
will be sure not to penalize you for this.
5) Cell phones and laptop computers cannot be used in class.

14. Texts and Readings

Given that we cover a number of different topics in capital market asset pricing, there is no
required textbook. However, if you would like a textbook treatment of many of the concepts
that we cover, I would recommend Investments, by Bodie, Kane and Marcus, 5th Edition,
Irwin/McGraw Hill, 2002.

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 15. Course outline

Class Date Subject Hwk Assigned Hwk Due

1 5/12 Introduction
2 5/17 FI #1 Institutional features and pricing Treasuries. #1
3 5/21 FI #2 Prices, yields and empirical implications.
4 5/24 FI #3 Bootstrapping and Duration. #2 #1
5 5/26 FI #4 Forward Rates
6 6/2 FI #5 Eurodollars and Swap Rates #3 #2

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7 6/4 FI #6 Corporate debt, Fannie Mae
8 6/7 FI #7/ EQ #1 FI review and EQ Introduction #4 #3
9 6/9 EQ #2 Investing in the market
10 6/14 EQ #3 Multiple Asset Problems #5 #4
11 6/16 EQ #4 Finding Your Place on the Frontier
12 6/21 EQ#5 CAPM #5
6/21 Take Home Midterm Assigned
6/25 Midterm is Due
13 6/28 EQ #6 CAPM
14 6/30 EQ #7 CAPM
15 7/7 EQ #8 Asset Management and Equity Review #6 Equity Project
16 7/12 EQ #9 Student Presentations
17 7/14 Op #1 The Trillion Dollar Bet #7 #6
18 7/19 Op #2 Option Basics and 1- period binomial Model
19 7/21 Op #3 Multi-period binomial model #8 #7
20 7/26 Op #4 Bounds and American options
21 7/28 Op #5 The Black-Scholes Formula #9 #8
22 8/2 Op #6 Implied volatility
23 8/4 Op #7 Valuing corporate debt #9
24 8/9 Course Review

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The trading game and the equities project will be assigned. Students must register for the trading game and pick a
stock for the project by 6/7. The equity project will be due on 7/7.