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- Based on the three analytical pillars of finance:
- Time value of money.
- Valuation.
- Risk management (including Portfolio Theory).
- Broader in scope than traditional introductory level finance texts that focus on a particular subfield such as corporate (managerial) finance, investments, or financial markets and institutions.
- Explains what finance is and how it works.
- Reviews corporate financial statements from an owner's perspective.
- Emphasizes the application of finance problems to decision problems faced by households and firms.
- New greatly expanded supplements package for Fall 1999.
- Covers derivative and contingent claims pricing methodology.
- Presents key corporate financial decisions in depth.
- Includes several important pedagogical features:
- Examples illustrate theory at work in making financial decisions.
- Concept questions help students check their understanding of the material. Answers are provided at the end of each chapter.
- Boxes throughout the text contain newspaper clippings and applications to encourage students to make active use of theory in dealing with their own affairs and when interpreting the news.
- End-of-chapter self-tests, questions, and problems.
- Authored by two of the most famous figures in Finance--a recent Nobel Prize winner and the best-selling Investments author.
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Untitled
Finance is an introductory text intended for use in the first course at the MBA level. It has a broader scope and a greater emphasis on general principles than most other introductory-level texts in finance, which typically focus exclusively on corporate finance. The preliminary edition of this text, which was published in September 1997, has also proven to be well suited for students of economics, law, mathematics and for business executives seeking a solid understanding and overview of the entire field of finance.
SCOPE OF THE TEXT
In most well-developed fields of study, such as chemistry, the educational norm is for the introductory course to cover general principles and to give the student an appreciation of the scope of the whole discipline's subject matter. It thereby lays the foundation for more specialized courses that have a narrower focus, such as organic or inorganic chemistry. In line with this approach, our text encompasses all of the subfields of finance, corporate finance, investments, and financial institutions within a single unifying conceptual framework.
CONTENT AND ORGANIZATION
Finance as a scientific discipline is the study of how to allocate scarce resources over time under conditions of uncertainty. There are three analytical "pillars" to finance: optimization over time (the analysis of intertemporal trade-offs), asset valuation, and risk management (including portfolio theory). At the core of each of these pillars are a few basic laws and principles that apply across all of the topical subfields.
The book is divided into six major parts. Part I explains what finance is, gives an overview of the financial system, and reviews the structure and uses of corporate financial statements. Parts II, III, and IV correspond to each of the three conceptual pillars of finance and emphasize the application of finance principles to decision problems faced by households (life-cycle financial planning and investments) and firms (capital budgeting). Part V covers the theory and practice of asset pricing. It explains the Capital Asset Pricing Model, and the pricing of futures, options, and other contingent claims, such as risky corporate debt, loan guarantees, and levered equity. Part VI deals with issues in corporate finance: capital structure, mergers and acquisitions, and real options analysis of investment opportunities.
Finance is intended for use in its current form anywhere in the world. The book is written so that its concepts are as relevant and understandable to a student in Argentina, France, Japan, or China as they are to a student in the United States. The international aspects of finance are integrated throughout the book, not confined to specific, separate "international" chapters.
PEDAGOGICAL FEATURES
There are many examples to illustrate theory at work in making financial
decisions.
There are "Quick Check" concept questions at critical points in the text to help students check their understanding of the material just presented. Answers to these questions are provided at the end of the chapter.
There are special-interest boxes inserted throughout the text containing newspaper clippings and applications that encourage students to make active use of the theory in dealing with their own affairs and in interpreting the financial news.
There are a large number of end-of-chapter problems, sorted by topic and level of difficulty. Complete step-by-step solutions for all problems are provided in the Instructor's Manual in a format that allows adopters of the text to distribute them to their students.
A special set of spreadsheet templates, which correspond with selected end-of-chapter problems, was created by Craig Holden of Indiana University to accompany this textbook. They are contained on the Prentice Hall Finance Center CD-ROM found in the inside back cover of each copy of the text.
E-book icons, found adjacent to selected headings in the text, refer to the Spreadsheet Modeling Exercises Handbook. This handbook contains 19 models that demonstrate how students can build their own Excel spreadsheet models. The exercises guide the reader step-by-step through the implementation of models designed to teach the applied aspects of finance. The end result of each exercise is the production of an Excel template that can be used repeatedly to implement models of professional quality for financial forecasting, discounted-cash-flow valuation, option pricing, and more. These same templates were used to create the numerical examples in the textbook itself. The Spreadsheet Modeling Student Handbook is included on the Finance Center CD.
FLEXIBILITY
The text is organized in a way that readily permits an instructor teaching a traditional introductory course in corporate or managerial finance to adopt the book. However, for schools that are currently updating their finance curriculum to reflect advances in the theory and practice of finance, Finance provides a flexible alternative to the traditional introductory text. Instead of focusing exclusively on corporate finance, it teaches the conceptual building blocks and applied techniques that are required in all areas of finance, investments and financial institutions, as well as corporate finance. Consequently, instructors in subsequent elective courses do not have to develop these fundamentals from scratch, as is often the case now. Finance's broad-based approach thereby eliminates considerable duplication of effort in the elective offerings.
The text is organized to allow instructors considerable latitude in choosing the content and level of detail they wish to deliver to their classes.
One outcome of this flexible structure is that an instructor who wishes to emphasize corporate finance in the introductory course can focus on Chapters 3, 6, 13, 16, and 17 and still provide effective coverage of general valuation and risk management by using selected chapters from Parts III and IV. Instructors who instead wish to emphasize investment subjects such as portfolio selection and option pricing in the introductory course can readily do so by covering more chapters from Parts IV and V.
REQUIRED LEVEL OF MATHEMATICS
The level of mathematical sophistication required to understand the text is elementary algebra. We provide many algebraic models in the text, which serve as the foundation for spreadsheet modeling.
CHANGES SINCE THE PRELIMINARY EDITION
In September 1997 Prentice Hall published a preliminary edition of this text with the intention of getting extensive feedback from teachers of finance and other reviewers. To our delight, several universities adopted the preliminary edition, and we were therefore able to benefit from their experiences with it. Here is what we learned from these class testers of the preliminary edition and the way we have responded in this first edition:
Students liked the emphasis on practical financial decision making, especially the examples drawn from personal finance. We have therefore reorganized the old Chapters 4 and 5. The revised Chapter 5, Life-Cycle Financial Planning, is now a self-contained primer in personal financial decision making, using time value of money concepts in making saving, borrowing, and investment decisions over the life cycle.
Readers liked Chapter 3 on financial statements, but many thought that it is best to cover financial forecasting and working capital (the old Chapter 19) as part of the same unit. In the first edition, these two chapters have been combined into a single revised Chapter 3, How to Interpret and Forecast Financial Statements. This is a self-contained primer that requires no prior knowledge of
accounting.
In response to faculty reviewer comments, coverage of corporate finance topics is significantly expanded in the first edition. As already noted, management of working capital and the construction of pro forma statements for forecasting have been incorporated into an expanded Chapter 3 on financial statements. Chapter 6, on capital budgeting, now contains a detailed spreadsheet analysis of an investment project, including the calculation of expected cash flows and sensitivity analysis of NPV. This same project appears in the Spreadsheet Modeling Exercises Handbook with step-by-step instructions on how to build the model and to carry out sensitivity analyses using Excel. Chapter 16 now contains the APV, FTE, and WACC approaches to integrating financing considerations into the capital budgeting decision. A detailed analysis and illustration compares the three approaches and demonstrates their mutual consistency. Furthermore, Chapter 16 has added a detailed discussion of how a firm's financing mix is
chosen in the real world, underscored with several concrete examples.
In general, reviewers found the second half of the preliminary edition to be more difficult to understand than the first half. We have therefore made the first edition flow more evenly by simplifying the second half, and reviewers of the revised text have unanimously praised the results of that effort. For example, we have simplified and streamlined the presentation of options and contingent claims. Instead of separate chapters on each, there is now a single, revised Chapter 15, Options and Contingent Claims, and it is full of practical examples of how options and option-pricing concepts can be applied. We have also combined the old Chapters 11 and parts of 12 into a single Chapter 11, Hedging, Insuring, and Diversifying, to allow more instructors to fit these risk management topics into the introductory course.
As a result of messages received from several careful readers, we have corrected a number of typographical and numerical errors that crept into the preliminary edition. Nonetheless, despite these efforts, this first edition will almost surely contain some errors, and we ask your help in identifying them. We are committed to correcting all errors as soon as they are discovered. Please notify the authors directly by email sent to zbodie@bu.edu or rmerton@hbs.edu.
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Features | Preface | Table of Contents | Supplements | About the Authors | Top |
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- FINANCE AND THE FINANCIAL SYSTEM
- What Is Finance?
- The Financial System
- How to Interpret and Forecast Financial Statements
- TIME AND RESOURCE ALLOCATION
- The Time Value of Money and Discounted Cash Flow Analysis
- Life-Cycle Financial Planning
- How to Analyze Investment Projects
- VALUATION MODELS
- Principles of Asset Valuation
- How to Value Known Cash Flows: Bonds
- How to Value Unknown Cash Flows: Stocks
- RISK MANAGEMENT AND PORTFOLIO SELECTION
- Principles of Risk Management and Portfolio Selection
- Hedging, Insuring, and Diversifying
- Choosing an Investment Portfolio
- ASSET PRICING
- The Capital Asset Pricing Model
- Forward and Futures Prices
- Options and Contingent Claims
- CORPORATE FINANCE
- Capital Structure
- Finance and Corporate Strategy
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SUPPLEMENTS
- Test Item File (0-13-010635-6); (1063E-1)
- PH Custom Test
- Instructor's Manual with Solutions (0-13-945874-3); (94587-3)
- Spreadsheet Templates (0-13-020075-1); (2007E-8)
- Handbook for Spreadsheet Modeling
- Powerpoint Slides
- 40+ per chapter.
- Available on PHLIP only.
- Powerpoint Notes (0-13-020076-X); (2007F-6)
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Untitled
Zvi Bodie is Professor of Finance at Boston University's School of Management. He received his Ph.D. from the Massachusetts Institute of Technology and has served on the finance faculties of MIT's Sloan School and the Harvard Business School. Bodie has published widely on investing, financial innovation, and pension finance. Currently, he conducts research and lectures on the funding and investment policies of pension plans and on the financial aspects of social security reform. He is currently a member of the Pension Research Council at the Wharton School, and has served as an adviser to the Financial Accounting Standards Board, the OECD, and the World Bank.
Robert C. Merton is the John and Natty McArthur University Professor at the Harvard Business School. After receiving a Ph.D. in Economics from the Massachusetts Institute of Technology in 1970, he served on the finance faculty of MIT 's Sloan School of Management until 1988 when he moved to Harvard. Dr. Merton holds honorary degrees from the University of Chicago, Hautes Etudes Commerciales (Paris), University of Lausanne, National Sun Yat-sen University, and University of Paris-Dauphine. A Senior Fellow of the International Association of Financial Engineers, he was the first recipient of its Financial Engineer of the Year Award. He is a past president of the American Finance Association, and a member of the National Academy of Sciences. Dr. Merton received the Alfred Nobel Memorial Prize in Economic Sciences in 1997.
Dr. Merton's research is focused on developing finance theory in the areas of capital markets and financial institutions. He has written extensively on intertemporal portfolio choice, capital asset pricing, the pricing of options, risky corporate debt, loan guarantees, and other complex derivative securities. He has also written on the operation and regulation of financial institutions, including issues of capital budgeting, production, hedging, and risk management.
Before collaborating on Finance, Bodie and Merton worked together on several research projects, first at the National Bureau of Economic Research and then at the Harvard Business School. Over the past twenty years, they have coauthored at least ten publications on the theory and practice of finance.
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