LEONID KOGAN: I am Leonid Kogan.

JIANG WANG: I am Jiang Wang.

Welcome to Foundations of Modern Finance.
We are the instructors for this course.
LEONID KOGAN: In this course, we'll
introduce you to the core principles and some
of the most important techniques in modern finance.
The global financial system is complex
with multiple participants including households,
businesses, financial intermediaries,
and the governments, among others.
Yet, the diverse problems faced by these actors
can be understood and addressed using a unifying
framework and a relatively small set of fundamental principles.
This framework forms the foundation of modern finance,
and it is our purpose in this class
to equip you with the concepts and tools necessary to handle
a wide range of financial problems.
JIANG WANG: Here, we would like to give a brief description
about the structure and content of the course.
Part one of the course has four sections.
Section A provides an introduction to finance.
Sections B, C, and D then cover the basics
of financial market, risk analysis and evaluation,
and corporate finance.
The introductory section provides the foundation
for the whole course.
In lecture 1, we will develop a comprehensive and coherent
analytical framework to formulate
the fundamental financial challenges firms and households
face and lay down the general principles we
will use to tackle them.
In lecture 2, we will establish the key idea
in solving the central problem in finance,
which is how to value assets, cash rolls and projects.
In particular, we will develop a general methodology
for asset valuation, the arbitrage pricing approach,
by using prices of assets traded in the financial market.
We will then further develop this general asset valuation
methodology into powerful tools for the pricing of assets
or cash flows--
in particular, how to use the appropriate discount
rate properly adjusted for timing and risk
to obtain the present value of a cash flow.
LEONID KOGAN: In part B, we introduce
some of the largest and most important financial markets
and securities, fixed income securities and common stocks.
We discuss the main characteristics
of these securities and the markets where they trade.
We then develop valuation techniques
for fixed income assets and for equities.
Although these assets are quite different in their properties,
our approach to their valuation is
based on the same fundamental principle.
We value financial securities relative to other assets,
based on the principle of absence
of arbitrage or no free lunch.
We maintain this common perspective
as we explore some of the topics specific to each asset class,
such as bond duration or forecasting of stock dividends.
By the end of this section, you will learn the principles
and the core valuation methods used in fixed income and equity
markets.
In section C, we explore the notion of risk
which is central to many problems in finance.
In lecture 6, we'll look at how to model investment decisions
under uncertainty and how to measure risk quantitatively.
We introduce modern portfolio theory and risk management
through diversification.
In lecture 7, we introduce the arbitrage pricing theory,
which is a powerful framework for pricing for national assets
based on their risk profile.
This pricing framework is heavily
used across financial markets, including both equity
and fixed-income markets.
In lecture 8, we introduce the fundamental important concept
of market efficiency.
The concept of market efficiency refers
to the ability of markets to incorporate information
into prices.
This concept is central to modern finance
and connects to numerous other topics,
from firm financial policies to asset management.
In this lecture, we define the notion of market efficiency
and discuss its uses and limitations, as well as
relevant empirical evidence.
JIANG WANG: The last section of part 1
lays the foundation for modern corporate finance.
In lecture 9, we will establish value maximization
as the main goal in corporate financial decision making.
We will then apply the general framework
for financial analysis to major corporate financial decisions,
including capital budgeting, financing, payout,
and risk management.
Lecture 10 focuses on the real investment or capital budgeting
decisions of the firm, its most fundamental and important
decisions.
Here, we apply the asset valuation tools developed
earlier in the course to project valuation and capital
budgeting.
LEONID KOGAN: I have received my PhD in finance from MIT,
and I have been teaching here for the past 20 years
in various programs, including the Master of Finance,
the MBA, the Doctoral Program, and Executive Education.
The scope of my teaching at MIT includes
the Foundations course, on which this online class is based,
as well as advanced electives and doctoral courses
on capital markets and financial engineering.
My research spans a range of topics
in asset pricing, macro finance, and financial engineering.
JIANG WANG: Let me say a few words about myself.
I'm the Mizuho Financial Group professor
at MIT, where I have been for over 30 years.
I've taught various finance courses in the MBA,
Master of Finance, PhD, and executive programs
at Sloan, including introductory courses, like this one,
for many years.
My research is mostly in the area
of asset pricing, investment and risk
management, financial regulation,
and international finance.
We will be working together with you throughout this course
and hope you will enjoy it.