Financial Economics

Dr. Frank J. Fabozzi PhD, CFA, CPA serves as Senior Advisor of IndexIQ, Inc. Dr. Fabozzi serves as Principal of Information Management Network, LLC. He has been Professor in the Practice of Finance at Yale University, School of Management since 2006. Dr. Fabozzi was a Visiting Professor of Finance and Accounting at the Sloan School of Management, Massachusetts Institute of Technology from 1986 to August 1992. He was Adjunct Professor of Finance at Yale University from 1994 to 2006. He co-authored with Franco Modigliani the textbooks Foundations of Financial Markets and Capital Markets: Institutions and Instruments and co edited with Harry Markowitz The Theory and Practice of Investment Management. He is a widely published author on topics such as risk management and structured finance. He has been a Becton Fellow, Yale University, School of Management since 1994. Dr. Fabozzi was inducted into the Fixed Income Analysts Society's Hall of Fame and is the 2007 recipient of the C. Stewart Sheppard Award given by the CFA Institute. He is a Chartered Financial Analyst and Certified Public Accountant. Dr. Fabozzi holds B.A., M.A. and Ph.D. from City University of New York.

• Preface ix Acknowledgments xvAbout the Authors xviiCHAPTER 1 Introduction 1PART I FINANCE IN A CERTAINTY WORLD WITH A PERFECT CAPITAL MARKET 13CHAPTER 2 Consumer Financial Decisions 15CHAPTER 3 Creating Wealth by Investing in Productive Opportunities 31CHAPTER 4 How Investors Value Firms 50CHAPTER 5 Firm Financing Decisions in a Perfect Capital Market 78CHAPTER 6 Firm Investment Decisions 102PART II FINANCIAL SYSTEM 119CHAPTER 7 Financial Systems, Governance, and Organization 121CHAPTER 8 Market, Intermediary, and Internal Governance 151PART III TOOLS FOR COPING WITH RISK 177CHAPTER 9 The Microeconomic Foundations of Financial Economics 179CHAPTER 10 Contingent Claims and Contingency Strategies 199CHAPTER 11 Risk and Risk Management 216CHAPTER 12 On Choosing Risk Measures 234PART IV SELECTION AND PRICING OF RISKY ASSETS 255CHAPTER 13 Mean-Variance Portfolio Choice 257CHAPTER 14 Capital Asset Pricing Model 287CHAPTER 15 The APTand Factor Models 317CHAPTER 16 General Principles of Asset Pricing 339CHAPTER 17 Pricing Corporate Securities 366PART V DERIVATIVE INSTRUMENTS 383CHAPTER 18 Pricing Derivatives by Arbitrage: Linear Payoff Derivatives 385CHAPTER 19 Pricing Derivatives by Arbitrage: Nonlinear Payoff Derivatives 414PART VI CAPITAL MARKET IMPERFECTIONS AND THE LIMITS TO ARBITRAGE 449CHAPTER 20 Capital Market Imperfections and Financial Decision Criteria 451CHAPTER 21 Impediments to Arbitrage 479PART VII CAPITAL STRUCTURE DECISIONS IN IMPERFECT CAPITAL MARKETS 499CHAPTER 22 When Capital Structure Decisions Matter 501CHAPTER 23 Financing Decisions in Practice 522CHAPTER 24 Financial Contracting and Deal Terms 545PART VIII INCORPORATING RISK IN CAPITAL BUDGETING DECISIONS 577CHAPTER 25 Capital Expenditure Plans in a Risky World 579CHAPTER 26 Evaluating Project Risk in Capital Budgeting 607SUBJECT INDEX 639AUTHOR INDEX 650FINANCE APPENDICES WEB-APPENDIX A Deal Terms 653WEB-APPENDIX B Corporate Debt Funding Instruments 658WEB-APPENDIX C Investment Bankers and the Issuance of Securities 665WEB-APPENDIX D Credit Risk 668WEB-APPENDIX E Financial Statements 677WEB-APPENDIX F Financial Ratio Analysis 682WEB-APPENDIX G Estimating Cash Flows of Capital Budgeting Projects 692WEB-APPENDIX H Merger and Acquisition Strategies 697WEB-APPENDIX I Conglomerates as a Means of Overcoming Capital Market Imperfections 701WEB-APPENDIX J Lease Financing 705MATHEMATICAL AND STATISTICAL APPENDICESWEB-APPENDIX K Taylor Series Approximation 716WEB-APPENDIX L Some Elementary Concepts Involving Probability 717WEB-APPENDIX M Continuous Probability Distributions 722WEB-APPENDIX N Continuous Interest Rates 730WEB-APPENDIX O Fundamentals of Matrix Algebra 733WEB-APPENDIX P Principal Component Analysis in Finance 745SUBJECT INDEX (WEB-APPENDIX A TO P) 751AUTHOR INDEX (WEB-APPENDIX A TO P) 754* Web-Appendix A to P are online only—please go to www.wiley.com/college/fabozzi