Finance Theory

Robert C. Merton

Table of Contents

I.

Introduction .............................................................................................................

II.

On the Arithmetic of Compound Interest: The Time Value of Money................

III.

On the Theory of Accumulation and Intertemporal Consumption Choice by

Households in an Environment of Certainty ...............................................

34

On the Role of Business Firms, Financial Instruments and Markets in an

Environment of Certainty.............................................................................

57

The "Default-Free" Bond Market and Financial Intermediation in Borrowing

and Lending ..................................................................................................

76

VI.

The Value of the Firm Under Certainty .................................................................

115

VII.

The Firm's Investment Decision Under Certainty: Capital Budgeting and

Ranking of New Investment Projects...........................................................

134

VIII.

Forward Contracts, Futures Contracts and Options...............................................

151

IX.

The Financing Decision by Firms: Impact of Capital Structure Choice on

Value.............................................................................................................

165

X.

The Investor's Decision Under Uncertainty: Portfolio Selection .........................

185

XI.

Implications of Portfolio Theory for the Operation of the Capital Markets: The
Capital Asset Pricing Model ........................................................................

225

XII.

Risk-Spreading via Financial Intermediation: Life Insurance ..............................

241

XIII.

Optimal Use of Security Analysis and Investment Management ..........................

249

XIV.

Theory of Value and Capital Budgeting Under Uncertainty.................................

270

XV.

Introduction to Mergers and Acquisitions: Firm Diversification .........................

287

XVI.

The Financing Decision by Firms: Impact of Dividend Policy on Value ............

296

XVII.

Security Pricing and Security Analysis in an Efficient Market.............................

312

IV.

V.

Copyright 1982 by Robert C. Merton. These Notes are not to be reproduced without the authors
written permission. All rights reserved.