Financial Economics

Time Value of Money

• Present Value (PV) and Future Value (FV): Concepts that explain how money today is worth more than the same amount in the future due to its potential earning capacity.
• Discounting and Compounding: Techniques used to determine the present and future value of cash flows.

2. Risk and Return

• Portfolio Theory: The study of how investors can construct portfolios to optimize or maximize expected return based on a given level of market risk.
• Capital Asset Pricing Model (CAPM): A model that describes the relationship between systematic risk and expected return for assets, particularly stocks.
• Efficient Market Hypothesis (EMH): The theory that asset prices fully reflect all available information.

3. Financial Instruments

• Stocks: Shares of ownership in a corporation.
• Bonds: Debt securities issued by entities to raise capital.
• Derivatives: Financial contracts whose value is derived from the performance of underlying assets, indices, or interest rates (e.g., options, futures, swaps).

4. Corporate Finance

• Capital Structure: The mix of debt and equity financing used by a firm.
• Dividend Policy: Decisions regarding the distribution of a portion of the firm's earnings to shareholders.
• Investment Appraisal: Techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), and payback period for evaluating investment projects.

5. Market Efficiency and Behavioral Finance

• Market Anomalies: Patterns in stock returns that contradict the EMH, such as the January effect or momentum.
• Behavioral Finance: A field that combines psychological theories with conventional economics to explain why people make irrational financial decisions.

6. International Finance

• Exchange Rates: The price of one currency in terms of another.
• Balance of Payments: A statement that summarizes an economy’s transactions with the rest of the world.
• Foreign Direct Investment (FDI): Investment made by a firm or individual in one country into business interests located in another country.

7. Financial Markets and Institutions

• Stock Markets: Venues where stocks are bought and sold.
• Bond Markets: Platforms for the issuance and trading of debt securities.
• Banks and Financial Intermediaries: Institutions that provide financial services such as deposit taking, lending, and investment.

8. Financial Crises

• Causes and Consequences: Examination of the origins and impacts of financial crises, such as the 2008 global financial crisis.
• Regulation and Reform: Policies and measures implemented to prevent or mitigate the effects of financial crises.

Applications and Research

• Empirical Studies: Use of data and statistical methods to test theories and models in financial economics.
• Quantitative Finance: The application of mathematical models to financial markets and securities.
• Financial Engineering: The creation of new financial instruments and strategies.

Financial economics combines theoretical frameworks and empirical analysis to understand how markets operate, how assets are priced, and how individuals and institutions make financial decisions under conditions of uncertainty.