Economics 350

ECON 350
Investment Economics

1. Catalog Entry

ECON 350
Investment Economics

Credit hours (3)
Prerequisites: ECON 205

Introduction to investment theory, securities markets, risk and returns, mechanics of investment and security analysis.

2. Detailed Description of Course

This course is designed and taught to give students both theoretical and practical training in saving and investment decisions at various levels.  Contemporary issues in money, finance, portfolio management, risk analysis, trading in stocks, bonds, and options receive heavy emphasis.  In addition, the interrelationships between economic activity and the financial sector is analyzed at considerable length.

Topic Outline
    1) Nature of Investment
    2) Investors and Investment
    3) The Investment Environment: Time Value of Money
    4) Measuring Investment Return
    5) Risk Analysis
    6) Risk and Return with Debt Instruments
    7) Investing in Instruments to Meet Liquidity Needs
    8) Monetary Policy and Its Impact on the Bond and the Stock Markets
    9) The Wall Street Journal
    10) Sources of Financial Information
    11) Analysis of the National Economy

3. Detailed Description of Conduct of Course

The following teaching strategies may be employed:

Lectures, discussions, videotapes, at least one guest speaker, and overhead presentations.  All students are required to apply their theoretical knowledge by investing in stocks, bonds, and options in the context of a “Stock Market Game” written by the instructor.  Students are rewarded based on their choices of portfolios of assets, their timing of purchases and liquidations, and their overall records of profits and losses.  

4. Goals and Objectives of the Course

Following completion of this course, students will be able to:   

    1) Explain the importance of savings and investments.
    2) Understand the difference between financial and real assets.
    3) Describe the difference between real and nominal rates of return.
    4) Convert nominal quantities such as income and wealth to real quantities.
    5) Explain why and how households, businesses, and governments borrow money.
    6) Describe the distinction between primary and secondary markets.
    7) Understand the impact of recent financial innovations.
    8) Analyze how changes in interest rates affect the prices of financial and real assets.
    9) Explain why economists, investors, and policy makers are all interested in the effects of
        monetary events on economic activity.
    10) Explain the time value of money.
    11) Understand that interest rate is the price paid for the use of money, credit, or loanable funds.
    12) Understand that there are many interest rates, not just one.
    13) Understand the difference between bonds and stocks.
    14) Understand the rights of bondholders supersede the rights of stockholders.
    15) Understand that bondholders can take legal action to force payment of interest and principal
          while stockholders cannot force payment of dividends.  
    16) Understand why holders of common stock are the legal owners of an incorporated firm.
    17) Explain the difference between the book value and the market value of a stock.
    18) Understand that a corporation does not normally distribute all its earnings.
    19) Explain how the provision of limited liability may encourage small investors to become part
          owners of large corporations.
    20) Describe how the earnings of a corporation are taxed twice.
    21) Describe the role of investment bankers in underwriting, marketing, and distribution of new
          stock issues.
    22) Describe the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and
          the National Association of Securities Dealers (NASDAQ).
    23) Explain the economic significance of stock and commodity exchanges.
    24) Describe the functions of stock specialists.
    25) Understand the difference between ask and bid prices.
    26) Understand the meaning of the terms shown in summary form in conjunction with stock price
          quotations in the Wall Street Journal.
    27) Explain P/E ratio and dividend yield.
    28) Describe the Dow Jones Industrial Average, The Standard and Poor’s 500, and the Wilshire
    29) Compute present value of a stock using the fundamental analysis approach.
    30) Explain the implications of the constant-dividend-growth model.
    31) Describe the historical link between the economy and the stock market.
    32) Analyze the relationships between interest rates and the level of stock prices.
    33) Understand the meaning of the “announcement effect.”
    34) Understand the relationship between an investor’s required rate of return and the rates of
          return available on other investments.
    35) Calculate the future value of an investment under varying compounding arrangements.
    36) Calculate the present value of a constant cash flow using the appropriate equation.
    37) Compute the present value of a perpetual cash flow.
    38) Define yield to maturity, coupon, and coupon rate.
    39) Compute yield to maturity on Treasury bills, zero coupon bonds, and coupon bonds.
    40) Explain the inverse relationship between a bond’s price and its yield to maturity.
    41) Describe the types of tax-exempt bonds issued by state and local governments.
    42) Explain the effect of inflation on nominal interest rates.
    43) Explain the difference between the nominal and real interest rate.  
    44) Define default risk.
    45) Explain why differences in interest rates are partially due to differences in changes of default.
    46) Explain why bond defaults have not been too widespread in the past.
    47) Understand why bonds with low ratings have high yields to maturity.  
    48) Explain why U.S. Treasury securities are not rated.
    49) Describe the intricacies of rating state and local government bonds.
    50) Explain the relationship between bond quality and the rating assigned by rating agencies.
    51) Describe the financial ratios bond rating agencies use for determining bond quality.
    52) Understand the relationship between the yield on a bond and the probability of default by
    53) Describe the reasons behind the sweeping acceptance of junk bonds in the 1980s.
    54) Explain why tax incentives have contributed to rising corporate indebtedness over the years.
    55) Analyze the reasons for the deterioration in the quality of corporate bonds in recent years.  
    56) Explain how the prime rate is determined by large commercial banks.
    57) Analyze the reasons for the strong correlation between banks’ prime rates and the
          commercial paper rates.
    58) Understand that long-term bonds have capital risk in that changes in interest rates affect
          their market value.
    59) Understand that interest rates fluctuate considerably, causing large changes in bond prices
          and substantial capital gains or losses for bondholders.
    60) Understand that short-term bonds have income risk because future interest rates cannot be
          predicted with any degree of certainty.
    61) Understand that fixed income securities, especially long-term ones, have inflation risk.
    62) Understand that the term structure of interest rates describes the yields to maturity on
          zero-coupon bonds that have the same default risk.
    63) Understand that the yield curve compares the yields to maturity on coupon-paying bonds with
          different maturities.
    64) Understand that variations in the term structure may be explained by interest rate
    65) Analyze the implications of the Hicks equation.
    66) State the assumptions behind the Expectations Hypothesis.
    67) Describe the relationship between short-term and long-term interest rates using the
          Expectations Hypothesis.
    68) Compute the present value of a coupon bond given annual coupon payment, years to
          maturity, and maturation value.
    69) Compute a bond’s yield to maturity given its price, years to maturity, and its maturation
    70) Understand why the yield to maturity on zero-coupon bonds does not necessarily coincide
          with the yield to maturity on coupon bonds of similar maturity and default risk.
    71) Explain why it is difficult to forecast interest rates.
    72) Compute an asset’s duration and its sensitivity to changes in interest rates.
    73) Describe how an asset’s duration may be used to gauge its capital risk.
    74) Define futures and forward contracts.
    75) Understand the difference between “long” and “short” positions.
    76) Explain the difference between futures and options contracts.
    77) Understand why both the buyer and the seller of a futures contact are protected against
          unforeseen changes in the market price of a commodity or a financial asset.
    78) Understand the meaning of speculation.
    79) Describe how futures and options are used for hedging, speculation, and arbitrage.
    80) Explain the advantages of a standardized futures contract.
    81) Explain the terms used to quote the particulars of a futures contract for a commodity or a
          financial asset.
    82) Understand the meaning of such terms as open market and in the futures market.
    83) Describe the purpose behind marking to market.
    84) Compare the role of margin in the stock market and in the futures market.
    85) Explain why the futures price is equal to the spot price on the delivery date.
    86) Analyze the objectives of program trading.
    87) Explain the distinction between index arbitrage and portfolio insurance.
    88) Articulate the major causes of the stock market collapse on October 19, 1987.
    89) Describe a call option and a put option.
    90) Describe exercise price, exercise value, and exercise date.
    91) Describe the meaning of such terms as “in the money” and “out of the money.”
    92) Understand that an index option is an option contract based on the value of an index of asset
    93) Understand that the basis is the difference between the futures price and the current spot
    94) Explain the relationships between futures price, spot price, and cost of carry.
    95) Explain the interest-rate parity equation.
    96) Describe the cause of speculative bubbles.
    97) Describe the historical and economic events that led to the crash of the stock market in 1929
          and 1987.
    98) Compare and contrast the stock market crash in 1929 with that in 1987.
    99) Explain the three forms of the efficient-market hypothesis and their implications.
    100)Describe the empirical evidence for and against the three forms of the efficient-market
    101)Understand the role of “future markets” in the allocating resources and reducing market

5. Assessment Measures

May include: tests, quizzes, and stock-market game reports.

6. Other Course Information

Students are required to subscribe to the Wall-Street Journal for the duration of the game.  In addition, all reports and charts pertaining to the stock market game must be carried out using LOTUS 1-2-3 or a similar software.

Review and Approval

September 2, 2014
December 2013 C. Vehorn
April 16, 2012
December 2004 N. Hashemzadeh