Finance Theory
by Robert C. Merton
Table of Contents
I. Introduction ............................................................................................................. 1
II. On the Arithmetic of Compound Interest: The Time Value of Money................ 8
III. On the Theory of Accumulation and Intertemporal Consumption Choice by
Households in an Environment of Certainty ............................................... 34
IV. On the Role of Business Firms, Financial Instruments and Markets in an
Environment of Certainty............................................................................. 57
V. The "Default-Free" Bond Market and Financial Intermediation in Borrowing
and Lending .................................................................................................. 76
VI. The Value of the Firm Under Certainty ................................................................. 115
VII. The Firm's Investment Decision Under Certainty: Capital Budgeting and
Ranking of New Investment Projects........................................................... 134
VIII. Forward Contracts, Futures Contracts and Options............................................... 151
IX. The Financing Decision by Firms: Impact of Capital Structure Choice on
Value............................................................................................................. 165
X. The Investor's Decision Under Uncertainty: Portfolio Selection ......................... 185
XI. Implications of Portfolio Theory for the Operation of the Capital Markets: The
Capital Asset Pricing Model ........................................................................ 225
XII. Risk-Spreading via Financial Intermediation: Life Insurance .............................. 241
XIII. Optimal Use of Security Analysis and Investment Management .......................... 249
XIV. Theory of Value and Capital Budgeting Under Uncertainty................................. 270
XV. Introduction to Mergers and Acquisitions: Firm Diversification ......................... 287
XVI. The Financing Decision by Firms: Impact of Dividend Policy on Value ............ 296
XVII. Security Pricing and Security Analysis in an Efficient Market ............................. 312