Advances in
Financial Education

Volume 5                                               CONTENTS                                      Spring 2007


Teaching and Reinforcing Professional Skills in the Finance Classroom

Marsha Weber

The importance of teaching effective communication and other professional skills to business school students is well-documented. Managers require their employees to have strong professional skills and expect to hire graduates who possess these skills. The purpose of this paper is to suggest several methods for incorporating assignments and exercises into finance courses that encourage development or reinforcement of professional skills, including student perception profiles; team building exercises; analysis of tables, graphs, and charts; a business e-mail writing assignment; and a business presentation. Students generally respond favorably to these types of assignments which reinforce the course content as well as the additional skills they will need for their careers.

Pages 1-28

An Interactive Model for Teaching Leverage Concepts

Jonathan D. Stewart and Mike Wiggins

The concept of leverage is one of the most fundamental and important ideas taught in an introductory Financial Management course. Unfortunately, many students find it difficult to understand the finer implications associated with the use of operating and financial leverage. This paper describes a pedagogical tool that was designed to enhance student understanding of the impact of operating, financial, and combined leverage on the performance of a firm. The approach is based on an interactive graphical representation of these concepts, which is tied to the income statement. The interface allows students to simultaneously observe the impact of an initial leverage scenario and then witness how firm performance changes as leverage changes. Student learning was measured for two groups, one that was exposed to the Interactive Leverage Model, and one that was not. Results indicate that the Interactive Leverage Model enhanced student understanding of fundamental leverage concepts.

Pages 29-40

Embedded Options in Mortgage Backed Securities

James E. McNulty and Nivine Richie

We distinguish six options in the mortgage market: the borrower’s option to prepay the mortgage, the lender’s option to require a due on sale clause, the homeowner’s option to walk away from an application, the option found in standby commitments, the option found in mortgage servicing, and the option found in mortgage extension. The option adjusted spread approach, widely used on Wall Street in collectively valuing several of these options, can be incor-porated into investments and financial institutions courses. We provide an overview of the approach, a summary of relevant practitioner literature and an illustration of the development of the methodology over the past fifteen years.

Pages 41-57

A Comparison of the Changes in the Debt-to-Equity Ratio and the Debt Ratio

Thomas Aiuppa

This paper compares certain characteristics of two common measures of debt, the debt-to-equity ratio and the debt ratio. The results demonstrate that the change and the rate of change are greater for the debt-to-equity ratio than for the debt ratio. The presentation includes results of proofs in terms of book values which are often used to monitor firms. The implication is that the debt-to-equity ratio is better than the debt ratio as a measure to reflect the notion of increasing risk as debt increases.

Pages 58-71

The Clarity of Bank Loan Terminology: Practitioner Versus Academic Nomenclature

Richard M. Burns, Candace Credito, Walter Reinhart and Joe Walker

This paper explores current commercial and consumer-lending banking terminology and practices compared with recently published corporate financial textbooks. Although the survey data collected agrees with much of the terminology coined by textbook authors geared toward undergraduate and graduate finance students, the evidence herein shows that the educational nomenclature differs in many other ways from that commonly utilized in today’s banking industry. In addition, some of the loan types discussed in finance textbooks are not always offered by banks. Survey findings suggest that textbooks are out of date and need to be updated to reflect current practice.

Pages 72-90