RSM230H1
Financial Markets
COMPLETE STUDY BUNDLE
University of Toronto · Rotman Commerce
Academic Year 2026/2027 · Graded A+ · Verified Answers
📖 Part 1 📝 Part 2 ✅ Part 3
Complete Study Guide 15 topics covered Midterm Exam Q&A 30 questions + Final Exam Q&A 30 questions +
rationales rationales
Based on Corporate Finance by Stephen A. Ross (required RSM230 textbook)
RSM230H1 Financial Markets | University of Toronto Rotman Commerce | 2026/2027 | Page 1
, PART 1 — COMPLETE STUDY GUIDE
Unit 1: Overview of the Financial System
The financial system channels funds from savers (surplus units) to borrowers (deficit units) through financial
markets and intermediaries.
Key Components
● Financial Markets: where securities are issued and traded (primary vs. secondary markets)
● Financial Intermediaries: banks, insurance companies, mutual funds, pension funds
● Financial Instruments: stocks, bonds, derivatives, money market instruments
● Regulatory bodies: OSFI, Bank of Canada, provincial securities commissions (OSC, ASC)
Primary vs. Secondary Markets
Feature Primary Market Secondary Market
Purpose New securities issued to raise capital Trading of existing securities between
investors
Participants Issuer + underwriter + investors Investors buying/selling among
themselves
Price set by Underwriter (IPO pricing) Supply and demand
Example IPO, bond issuance TSX, NYSE trading
Proceeds go to Issuing company Selling investor
Money Market vs. Capital Market
Money Market Capital Market
Maturity < 1 year > 1 year
Instruments T-bills, commercial paper, bankers' Stocks, bonds, mortgages
acceptances
Risk Lower Higher
Purpose Short-term liquidity Long-term financing
Unit 2: Time Value of Money (TVM)
A dollar today is worth more than a dollar in the future due to its earning potential. TVM is the foundation of all
security valuation.
Core Formulas
Concept Formula Key Variables
Future Value (FV) FV = PV × (1 + r)ⁿ PV = present value, r = rate, n
= periods
Present Value (PV) PV = FV / (1 + r)ⁿ Discounting future cash flows
Annuity PV PV = C × [1 – (1+r)⁻ⁿ] / r C = periodic cash flow
Perpetuity PV PV = C / r Infinite equal cash flows
RSM230H1 Financial Markets | University of Toronto Rotman Commerce | 2026/2027 | Page 2
, Concept Formula Key Variables
Growing Perpetuity PV = C / (r – g) g = constant growth rate
Example — PV of a Bond
A $1,000 bond pays $60 annually for 5 years and returns $1,000 at maturity. If the discount rate is 7%:
PV = 60/1.07 + 60/1.07² + 60/1.07³ + 60/1.07⁴ + (60+1000)/1.07⁵ = $958.99
Unit 3: Bond Valuation
A bond's price is the present value of all future cash flows (coupon payments + face value) discounted at the
required yield.
Key Concepts
● Par / Face Value: the amount repaid at maturity (typically $1,000)
● Coupon Rate: annual interest payment as a % of face value
● Yield to Maturity (YTM): the total return anticipated if held to maturity
● Current Yield: Annual coupon / Current price
Bond Price–Yield Relationship
Relationship Effect on Price
YTM > Coupon rate Bond trades at a DISCOUNT (below par)
YTM < Coupon rate Bond trades at a PREMIUM (above par)
YTM = Coupon rate Bond trades at PAR ($1,000)
Rates rise Bond prices FALL (inverse relationship)
Rates fall Bond prices RISE
Duration — Interest Rate Risk
● Duration measures bond price sensitivity to interest rate changes
● Longer maturity = Higher duration = More price risk
● Higher coupon = Lower duration (more early cash flows reduce sensitivity)
Unit 4: Equity / Stock Valuation
Dividend Discount Model (DDM)
Stock price = PV of all future expected dividends.
Model Formula When to use
Zero-growth DDM P=D/r Preferred stock; constant dividend
forever
Constant-growth DDM P = D₁ / (r – g) Stable company with steady
(Gordon) dividend growth
Multi-stage DDM PV each stage separately, then terminal High-growth companies
value transitioning to stable growth
RSM230H1 Financial Markets | University of Toronto Rotman Commerce | 2026/2027 | Page 3
Financial Markets
COMPLETE STUDY BUNDLE
University of Toronto · Rotman Commerce
Academic Year 2026/2027 · Graded A+ · Verified Answers
📖 Part 1 📝 Part 2 ✅ Part 3
Complete Study Guide 15 topics covered Midterm Exam Q&A 30 questions + Final Exam Q&A 30 questions +
rationales rationales
Based on Corporate Finance by Stephen A. Ross (required RSM230 textbook)
RSM230H1 Financial Markets | University of Toronto Rotman Commerce | 2026/2027 | Page 1
, PART 1 — COMPLETE STUDY GUIDE
Unit 1: Overview of the Financial System
The financial system channels funds from savers (surplus units) to borrowers (deficit units) through financial
markets and intermediaries.
Key Components
● Financial Markets: where securities are issued and traded (primary vs. secondary markets)
● Financial Intermediaries: banks, insurance companies, mutual funds, pension funds
● Financial Instruments: stocks, bonds, derivatives, money market instruments
● Regulatory bodies: OSFI, Bank of Canada, provincial securities commissions (OSC, ASC)
Primary vs. Secondary Markets
Feature Primary Market Secondary Market
Purpose New securities issued to raise capital Trading of existing securities between
investors
Participants Issuer + underwriter + investors Investors buying/selling among
themselves
Price set by Underwriter (IPO pricing) Supply and demand
Example IPO, bond issuance TSX, NYSE trading
Proceeds go to Issuing company Selling investor
Money Market vs. Capital Market
Money Market Capital Market
Maturity < 1 year > 1 year
Instruments T-bills, commercial paper, bankers' Stocks, bonds, mortgages
acceptances
Risk Lower Higher
Purpose Short-term liquidity Long-term financing
Unit 2: Time Value of Money (TVM)
A dollar today is worth more than a dollar in the future due to its earning potential. TVM is the foundation of all
security valuation.
Core Formulas
Concept Formula Key Variables
Future Value (FV) FV = PV × (1 + r)ⁿ PV = present value, r = rate, n
= periods
Present Value (PV) PV = FV / (1 + r)ⁿ Discounting future cash flows
Annuity PV PV = C × [1 – (1+r)⁻ⁿ] / r C = periodic cash flow
Perpetuity PV PV = C / r Infinite equal cash flows
RSM230H1 Financial Markets | University of Toronto Rotman Commerce | 2026/2027 | Page 2
, Concept Formula Key Variables
Growing Perpetuity PV = C / (r – g) g = constant growth rate
Example — PV of a Bond
A $1,000 bond pays $60 annually for 5 years and returns $1,000 at maturity. If the discount rate is 7%:
PV = 60/1.07 + 60/1.07² + 60/1.07³ + 60/1.07⁴ + (60+1000)/1.07⁵ = $958.99
Unit 3: Bond Valuation
A bond's price is the present value of all future cash flows (coupon payments + face value) discounted at the
required yield.
Key Concepts
● Par / Face Value: the amount repaid at maturity (typically $1,000)
● Coupon Rate: annual interest payment as a % of face value
● Yield to Maturity (YTM): the total return anticipated if held to maturity
● Current Yield: Annual coupon / Current price
Bond Price–Yield Relationship
Relationship Effect on Price
YTM > Coupon rate Bond trades at a DISCOUNT (below par)
YTM < Coupon rate Bond trades at a PREMIUM (above par)
YTM = Coupon rate Bond trades at PAR ($1,000)
Rates rise Bond prices FALL (inverse relationship)
Rates fall Bond prices RISE
Duration — Interest Rate Risk
● Duration measures bond price sensitivity to interest rate changes
● Longer maturity = Higher duration = More price risk
● Higher coupon = Lower duration (more early cash flows reduce sensitivity)
Unit 4: Equity / Stock Valuation
Dividend Discount Model (DDM)
Stock price = PV of all future expected dividends.
Model Formula When to use
Zero-growth DDM P=D/r Preferred stock; constant dividend
forever
Constant-growth DDM P = D₁ / (r – g) Stable company with steady
(Gordon) dividend growth
Multi-stage DDM PV each stage separately, then terminal High-growth companies
value transitioning to stable growth
RSM230H1 Financial Markets | University of Toronto Rotman Commerce | 2026/2027 | Page 3
