Journal of
Financial Education

Volume 36                                               CONTENTS                                      Spring/Summer 2010


A Re-Examination of the Market Segmentation Theory as a Pedagogical Model

R. Stafford Johnson, Richard A. Zuber and John M> Gandar

Butterfly yield curves, international capital flows, carry trade, and negative interest rates underlie some of the complexities extant today in understanding what determines the term structure of interest rates. Many financial markets texts and money and banking texts emphasize the Pure Expectations Theory and the Liquidity Preference Theory as the dominant theories in explaining the term structure and de-emphasize the Market Segmentation Theory (MST). The MST is the only one of theses theories based on fundamental supply and demand factors. As a result, the de-emphasis of MST as a yield curve explanation means that such important factors as economic conditions, stabilization policies, and Treasury financing, and such current financial developments as subprime lending, leveraged private equity acquisitions, TARP, and East Asian investments are not being fully examined in many financial markets texts. This paper presents the MST in terms of a basic supply and demand model based on Mishkin and Eakins’ exposition (2009) used for explaining the level of interest rates. This MST model, in turn, can be used both as a pedagogical tool to explain how important economic forces influence the term structure of interest rates and to serve as a foundation for explaining the other term structure theories.

Pages 1-37

Central Limit Theorems When Data Are Dependent: Addressing the Pedagogical Gaps

Timothy Falcon Crack and Oliver Ledoit

Although dependence in financial data is pervasive, standard doctoral-level econometrics texts do not make clear that the common central limit theorems (CLTs) contained therein fail when applied to dependent data. More advanced books that are clear in their CLT assumptions do not contain any worked examples of CLTs that apply to dependent data. We address these pedagogical gaps by discussing dependence in financial data and dependence assumptions in CLTs and by giving a worked example of the application of a CLT for dependent data to the case of the derivation of the asymptotic distribution of the sample variance of a Gaussian AR(1). We also provide code and the results for a Monte-Carlo simulation used to check the results of the derivation.

Pages 38-60

Merger Math

James M. Johannes and Terrance P. Maxwell

Mergers are a regular part of today’s financial landscape and a popular topic in finance and accounting classes. Unfortunately, the financial ratio analysis that goes into merger negotiations is not intuitive, easy to teach or easily understood by most students. This paper suggests both an algebraic and graphical way to teach students the key financial accounting relationships that are important to understanding merger deals.

Pages 61-79


Bloomberg 101

Robert H. Scott, III

Bloomberg’s Global Product Certification Program is an interactive training module designed to teach people how to use the Bloomberg Professional Service. The program is free for anyone with access to a Bloomberg terminal. Bloomberg is the financial industry’s most popular database system, so getting certified is practical and portable. This paper explains Bloomberg’s certification program, and serves as a guide for anyone wanting to get certified. Based on my experiences teaching the Bloomberg system to undergraduate students, an example of a one-credit Bloomberg certification course is provided. This course shows finance professors an established approach for adding certification into their finance curricula.

Pages 80-88

A Pit Trading Simulation Approach to Teaching Market Structure

Jeff Brown, Jonathan Clements, Terrance Grieb and Christian West

This paper details the use of a pit trading environment to teach students about market structure. As a part of this process, students learn about Iowa Electronic Market (IEM) style contracts and the mechanics of trading in a physical pit environment. We demonstrate that students had a high degree of interest in learning with this structure, and that significant learning occurred for all of our relevant learning outcomes.

Pages  89-104

A Comparison of Online Stock Trading Simulators for Teaching Investments

Joel Jankowski and Todd Shank

Computer-based stock trading simulations have been successfully used in teaching the mechanics of investing for decades. However, the use of trading simulators has historically required students pay a fee to open a trading account and to track their investment decisions. The recent introduction of financial asset trading simulators on the web that do not charge any user fees led us to question the necessity of continuing to require the fee-base simulators we have always chosen to use in our courses. To help an instructor making this decision, we analyze sixteen websites devoted to allowing participants to construct an investment portfolio and track their performance over a period of time. We analyze a sample of both free- and fee-based, online simulators with the goal of determining the suitability of each for various courses that seek to teach students how to invest in stocks, bonds, and/or derivatives.

Pages 105-119

Experiential Learning for Undergraduates in Economics and Finance: A True Top-Down Investment Fund

Robert C. Dolan and Jerry L. Stevens

The paper describes an experiential learning program noted for the comprehensive integration of applied economics and finance. The core idea links the operations of a top-down student-managed investment fund to analysis performed by the school's "Fed Challenge" team. The Fed Challenge team, which participates in an annual competition administered by several Federal Reserve banks, provides ongoing macroeconomic analysis and forecasting to support the asset allocation decisions of the student managed investment fund. Beyond macro input, economics students with an interest in industrial organization and microeconomics blend with finance students to determine sector weights for the student fund investments. This expanded format for a student managed fund offers a comprehensive and realistic vehicle for experiential learning. The program can be implemented in business schools where economics and finance are housed together as well as in liberal arts colleges where core finance courses are often taught in the economics department.

Pages 120-136

Extending the Presentation of the EBIT-EPS Relationship for Introducing Financial Leverage in the Classroom

John T. Rose

Most introductory finance textbooks use a graphical exposition of the EBIT-EPS relationship to introduce the concept of financial leverage and the effect of such leverage on a firm’s earnings. But texts vary considerably in how they speak of the risk of financial leverage within the EBIT-EPS construct, and no text fully incorporates risk into the EBIT-EPS graphical construct. This study reviews current textbook pedagogy for introducing financial leverage through the EBIT-EPS relationship and extends the standard EBIT-EPS presentation by providing a numeric and graphical example to incorporate explicitly a probability distribution of EBIT within the EBIT-EPS framework. In so doing, we show the trade-off between higher expected EPS and a higher probability of negative EPS for a levered firm. Finally, we encourage textbook authors to expand the traditional graphical exposition of the EBIT-EPS relationship to show the greater probability of negative EPS from a levered capital structure, thereby giving students a clearer understanding of the risk-return implications of financial leverage.

Pages 137-147


The Bentacourt Group

Francisco J. Lopez Lubian

In late November 2006 Mark Hughes, an analyst in the acquisitions financing department of the Madrid-based Capitol Bank, received a proposal from international bankers Bank London Investment to join a leveraged buyout of the Betancourt Group as the mandated lead arranger (MLA).

Pages 148-166