National Research University Higher School of Economics

Syllabus for
PRINCIPLES OF BANKING AND FINANCE, 2021-22

Lecturers:
 Nina Ryabichenko (both semesters)
 Vincent Fardeau (1st semester), Victor Shpringel (2nd semester)
Class teachers:
 Nina Ryabichenko, Irina Dergunova, Vasilisa Shuklina, Mikhail Tumanyan

Course prerequisites

Basic knowledge of micro/ macroeconomics and calculus/statistics, as taught in the first year at ICEF,
is required.

The course itself provides a basis (and thus serves as a prerequisite) for more advanced courses of in
banking and finance such as Asset Pricing and Financial Markets, Corporate Finance, Investment
Management, etc.

Course description

“Principles of Banking and Finance” is an introductory two-semester course for second-year

undergraduate students. The course is taught in English. It is part of the University of London
curriculum.

The approach of the course is analytical and emphasizes the link between microeconomics and
banking and finance. The first part of the course is devoted to principles of finance. It covers the
essentials of capital budgeting and securities valuation, as well as basic asset pricing theories and the
efficient market hypothesis. The second part deals with principles of banking. It compares different
banking systems and discusses the standard tools of risk management for financial institutions, the
regulation of the banking system, and the role and rationale of financial intermediation in the
economy.

Learning objectives and learning outcomes

The course provides students with foundational analytical and institutional knowledge in banking
and finance.

The first part of the course emphasizes the key concepts of modern theory of finance such as the
time value of money, the absence of arbitrage, the trade-off between risk and expected returns, the
notion of diversifiable risk and its implications for asset pricing, and the different forms and tests of
market efficiency.

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At the end of this part, students should be able to discuss the main theoretical and empirical drivers
of financial and real asset valuation. Students are also expected to acquire general knowledge about
standard financial assets and the risks they carry.

In the second part of the course, students learn about the consequences of asymmetric information
and transaction costs on banking. At the end of the course, they should also be able to highlight the
main differences between financial systems, explain the role and origins of financial intermediaries,
the methods used by banks to manage various types of risk, and the rationale for bank regulation.
Students are also expected to be able to discuss the main factors and developments of the 2007-2009
financial crisis.

Further, the course contributes to developing the following general competencies:

- The ability to analyze and interpret financial, accounting and other information contained in
the statements of enterprises of various forms of ownership, organizations, departments, etc.
- The ability to use financial, accounting and other information contained in the statements of
enterprises of various forms of ownership, organizations, departments, etc. for making
management decisions
- The ability to identify the scientific nature of the problems in the professional field
- The ability to organize their activities in the framework of professional tasks

Classwork tasks include elements of soft skills development such as teamwork, communication
abilities, and management skills. Classwork includes participation in discussions, problem-solving
(individually and in groups), group presentation on several topics. All activity in class is assessed in
the participation part of the classwork grade.

Methods of Instruction

Lectures
Classes
Self-study
Home assignments
Teachers’ and lecturers’ office hours.

Reading List

Main texts

1. [BM] Berk, J., DeMarzo, P., Corporate Finance, 3rd Ed., Pearson, 2014.
2. [BMA] Brealey, R.A., Myers S.C., Allen, F., Principles of Corporate Finance, Mc»Graw
Hill/Irwin, 2011. 10th Ed.
3. [ME] Mishkin F., Eakins S., Financial Markets and Institutions, Pearson, 2012, 7th Ed.
4. [SM] Saunders, A., Cornett, M., Financial institutions management, McGraw-Hill Higher
Education, 2nd Ed., 2000.

Supplementary reading

1. [AG] Allen F., Gale D. Comparing Financial systems. MIT Press, 2001.

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 2. [BT] Buckle, M., Thompson, J. The UK Financial system: theory and practice. Manchester
University Press, 1998
3. [CW] Copeland, T.E., Weston, J.F. Financial Theory and Corporate Policy. Addison-Wesley
Publishing Company, 1998.
4. [FM] Fabozzi,F., Markowitz, H. The Theory and Practice of Investment Management: Asset
Allocation, Valuation, Portfolio Construction, and Strategies, Wiley 2nd Edition
5. Zinsser, W. On Writing Well, The Classic Guide to Writing Nonfiction

UoL resources

UoL virtual learning environmnent

UoL study guide

Special Equipment and Software Support

If lectures are held in person, there is no special equipment required. Slides will be distributed on the
icef info system.

If lectures are online, students must install Zoom on their computers.

Online resources for the course are available on VLE of the University of London at
https://emfss.elearning.london.ac.uk/course/view.php?id=302

Grading system and Examination Type

 
Control takes the following forms:
 written home assignments;
 classwork;
 written exams, as follows:
 mid-term tests in October and March,
 first semester exam in December
 final exam in May (either University of London or ICEF final exam).

NOTE: The October and March midterm tests have the status of Control Papers with no retakes. The
December and May exams have the status of exam in the curriculum with a possible retake. The
October midterm test will have four questions, without possibility of choice.

If the course and exams take place in the classroom, the grading is as follows:
The grade of the first semester is based on home assignments (15%), October mid-term test (25%),
December exam (50%) and class-work (10%).

The course grade is determined by

                Final exam grade (50%) [University of London exam grade for the students
studying the course for both Internal and International degrees; ICEF final exam grade for
the students studying the course for Internal degree only]
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                 Mid-term tests (18%) – (8% - October mid-term test, 10% - March mid-term test)
                December exam (12%)
                Home assignments during the year (10%)
                Classwork during the year (10%).

So the formula for the final grade determination is

Grade= 0.5* Final exam + 0. 08* October Midterm + 0.1* March Midterm + 0.12* December exam
+0.1* Home Assignments +0.1* Classwork

If the course or the exam take place online, then the grading is as follows:

The grade of the first semester is based on home assignments (15%), October mid-term test (25%), a
special December home assignment (20%), the December online exam (30%) and class-work
(10%).

The December special home assignment will consist in essay questions. The December online exam
will consist of numerical and conceptual questions.

The course grade is determined by

                Final exam grade (50%) [University of London exam grade for the students
studying the course for both Internal and International degrees; ICEF final exam grade for
the students studying the course for Internal degree only]
                Mid-term tests (18%) – (8% - October mid-term test, 10% - March mid-term test)
                Special December home assignment (4.8%) and December online exam (7.2%)
                Home assignments during the year (10%)
                Classwork during the year (10%).

So the formula for the final grade determination is

Grade= 0.5* Final exam + 0. 08* October Midterm + 0.1* March Midterm + 0.072* December
exam +0.048*Special December Home Assignment+0.1* Home Assignments +0.1* Classwork

The passing grade for the University of London exam is 40 out of 100. The passing grade for the
course is 35 out of 100.

All grades are given initially out of 100. The final grades are also transferred to 10- and 5-points
grades in accordance with the ICEF Grading Regulations (par.3) available
athttps://www.hse.ru/docs/457166781.html.
Retakes are organized in accordance with the HSE Interim and Ongoing Assessment Regulations
(incl. Annex 8 for ICEF). Grade determination after retakes is done in accordance with ICEF
Grading Regulations (par. 5) available at https://www.hse.ru/docs/457166781.html.

Course Outline

Part I. Principles of Finance

1. Introduction

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Course overview. Overview of the financial system.
2. Financial markets and instruments.
Functions of the financial system. Types of financial intermediaries. Financial instruments (debt,
equity, derivatives). Market structures (OTC vs centralized exchanges, primary vs secondary
markets, etc.). Money and Capital Markets.

References:
 SC, Part I.
 ME, Ch. 1,2, 11-14, 20-22.

3. Capital Budgeting and Valuation

Fisher separation theorem.
Methods of project's valuation. Cash Flows. Concepts of present value and opportunity cost of
capital. NPV, IRR, Payback period.

References:
 CW, Ch. 1 (for Fisher separation theorem)
 BM, Ch 7,8.
 BMA, Ch. 2,5, 6.

4.Valuation of Fixed-Income Securities

Coupon and Discount Bonds. Annuities and Perpetuities. Valuation by absence of arbitrage. Yield
Curve. Term Structure Theories. Corporate bonds.

References:
 BM, Ch 5, 6.
 BMA, Ch. 3.
 ME, Ch. 5.

5. Risk and return

Mathematical characteristics of risk and return. Risk premia. Risk-return trade-off. The risk and
return of the portfolio. Correlation of returns. Benefits of diversification. Systematic and non-
systematic risks. Mean-variance portfolio theory: Efficient Frontier, Capital Market Line, Tangent
portfolio, Two-fund separation theorem.

References:
 BM, Ch. 10.
 BMA, Ch. 7, 8.

6. Asset pricing theories

CAPM and securities market line. Single- and multi-factor models. Factor-replicating portfolios.
Arbitrage Pricing Theory (APT). Theoretical and empirical validation of CAPM and APT.

References:
 BM, Ch. 11.
 CW, Ch. 6.
 Perold, A. (2004), The Capital Asset Pricing Model, Journal of Economic Perspectives, Vol.
18 (3), 3-24

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7. Stock valuation
Valuation of Stocks: Fair Price. DCF Models. Gordon Growth Model.

References:
 BM, Ch. 9, 12.
 BMA, Ch. 9.

8. Efficient markets
Weak, semi-strong, strong efficiency. Empirical tests of the weak-form: technical analysis,
momentum and reversal, Seasonal effects. Empirical tests of the semi-strong form: performance of
professional investors, event studies. Tests of the strong-form: Insider trading. Rational (friction-
based) vs behavioral explanations of anomalies.

References:
 BM,. Ch. 13.
 CW, Ch. 10, 11.
 Fama, E., Efficient Capital Markets: A Review of Theory and Empirical Work, The Journal
of Finance, Vol. 25, No. 2, 1970, pp. 383-417. Stable URL: http://www.jstor.org/stable/2325486

Part II. Principles of Banking

7. Economic analysis of financial structure

Why do financial intermediaries exist? Transaction costs. Asymmetric information: adverse
selection and moral hazard, principal-agent problem. Maturity, size and risk transformation.
Economy of scale and economy of scope. The ways to minimize principal-agent costs: collateral,
guarantees, capital requirements, self-regulation, credit bureaus.

References:
 ME, Ch. 7, 17.

8. Financial intermediation
Direct and indirect finance. Banks. S&L institutions. Co-operative banks. Mutual funds. Pension
funds. Insurance companies. Term structure of liabilities. The problem of excess regulation.
Disintermediation.

References:
 ME, Ch. 2, 9, 20-22.
 FM, Ch. 8-11.
 BT, Ch. 2.

9. Bank management: retail, wholesale, investment banks.

Retail banking: current account and time deposits, micro-financing, consumer loans, mortgages,
asset-backed securities, payment and credit cards.
Wholesale banking: large-scale loans, trade financing, loan commitments, commercial and standby
letters of credit, asset management, syndicated loans, arrangement and underwriting of corporate
bonds.
Investment banks: structure of transactions, risk sharing, syndicated loans, arrangement and
underwriting of bonds.
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References:
 BT, Ch. 3, 4, 11.

10. Risk management and internal control in banks.

Asset-side and liability-side liquidity risks. Liquidity gaps. Liquidity management and the role of
reserves. Asset-liability management. Purchase of funds. Treasury.
Interest rate margin. Interest rate risk. Fixed- and floating-rate assets and
liabilities. Interest rate gaps.
Credit risk. Types of credit risk (industrial, regional and country risks). Diversication of loan
portfolio.
Currency risk. Long and short open positions.
Capital adequacy. Economic capital.

References:
 ME, Ch. 17, 23, 24.
 SM, Ch. 4-6.

11. Banking regulation.

Banking supervision and inspection (on-sight and off-sight regulation). Capital adequacy ratio. The
Basel accords on risk-based capital requirement (Basel I and Basel II). Liquidity ratios. Open
currency positions. CAMEL. Disclosure requirements. Free banking. Government safety nets.
Deposit insurance.
Banking crises.

References:
 ME, Ch. 8, 18.
 BT, Ch. 17, 18.

12. Financial Systems Compared.

Bank-based and market-based systems. Islamic banking. Emerging markets. Financial crises:
banking, currency and debt crises. The peculiarities of the Russian banking systems.

References:
 ME, Ch. 16.
 AD, Ch. 1-3.

Distribution of hours (indicative)

Contact hours
Lectures Seminars
1. Introduction. 2. Financial Markets and
Instruments 6 4

3. Capital Budgeting and Valuation 4 6

4. Fixed Income 4 4

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 5. Risk and return 4 4
6. Asset pricing theories 6 6
7. Stock Valuation 2 2
8. Effective markets 4 4
Fall semester 30 30
7. Economic analysis of financial structure 4 4
8. Financial intermediation 6 6
9. Bank management: retail, wholesale,
4 4
investment banks
10. Risk management and internal control
8 8
in banks
11. Banking regulation 6 6
12. Financial Systems Compared 4 4
Spring Semester 32 32
Total 62 62

Organization of Studies for Persons with Limited Mobility and Disabilities

If necessary, learners with limited mobility or a disability (as per his/her application), as well as per
his/her individual rehabilitation programme, may be offered the following options for receiving
learning information with due consideration of his/her individual psycho-physical needs (e.g., via
eLearning studies or distance technologies):
- for persons with impaired vision: enhanced fonts in hard copy documents; e-documents; audio
files (transfer of study materials to an audio-format); hard copy documents with the use of
Braille; individual consultation with a facilitated communicator; individual assignments and
mentoring;
- for persons with hearing impairments: in hard copy; e-documents; video materials with
subtitles; individual consultation with a facilitated communicator; individual assignments and
mentoring;
- for persons with a muscular-skeleton disorder: in hard copy; e-documents; audio-files,
individual assignments and mentoring.