FINM7006 Applied Foundations of Finance
The Complete Exam Bible · S2 2026FINM7006 Overview
- Semester 2, 2026
- In person
- Postgraduate
- Finance
Applied Foundations of Finance is a postgraduate course that builds one connected finance method. It begins with the role of financial markets and the professional duties attached to investment judgment.
- Assessment shape Redeemable quizzes feed into a closed-book final examination
- Calculation habit Draw time first, match the periodic rate, then select the formula
- Allowed equipment Prepare a non-programmable scientific calculator
- Revision scope Connect theory and numerical work across the complete teaching sequence
How FINM7006 is assessed
| Component | Weight | Format |
|---|---|---|
| In-Tutorial Quiz 1 | 10% | Closed book, 20 minutes, Week 3 lecture material, redeemable against the final examination |
| In-Tutorial Quiz 2 | 10% | Closed book, 20 minutes, Week 8 lecture material, redeemable against the final examination |
| In-Tutorial Quiz 3 | 10% | Closed book, 20 minutes, Week 10 lecture material, redeemable against the final examination |
| Final Examination | 70% | Closed book, in person, 15 minutes reading and 2 hours writing, theory and numerical questions across the course |
The nominal rows sum to 100%. Each quiz contributes either 0% or 10% because it is redeemable against the final examination, so the final counts for at least 70% and may count for more. No component hurdle is stated in the published class summary.
Current FINM7006 dates
| Date | Item | Control |
|---|---|---|
| 17 Aug 2026 | In-Tutorial Quiz 1 | Scheduled assessment date |
| 5 Oct 2026 | In-Tutorial Quiz 2 | Scheduled assessment date |
| 19 Oct 2026 | In-Tutorial Quiz 3 | Scheduled assessment date |
Dates are as published in the Semester 2, 2026 class summary. Confirm exact deadlines and submission settings in the live LMS.
What FINM7006 covers
Move from financial markets and time value through valuation, portfolio risk and derivatives.
Financial Markets and Professional Conduct
Capital flows, financial claims and accountable investment judgmentFinancial markets move funds from savers toward firms and governments that can use capital, while financial claims and later returns move back toward investors.
- Capital flows between savers, markets and issuers
- Primary issuance versus secondary trading
- Debt, equity and derivative claims
- Integrity, competence and independent judgment
- Diligence, reasonable basis and communication
- Dissociation and documentation when a breach continues
Interest Rates and Compounding
Simple and compound growth, periodic rates and effective comparisonsCompounding moves value forward and discounting moves it backward. This chapter contrasts simple with compound interest, matches rates to their cash-flow periods and converts nominal quotations into effective rates for comparison.
- Why current cash has time value
- Simple interest versus compound growth
- Future and present value factors
- Nominal quotations and periodic rates
- Annual effective rate conversion
- Clock, direction and scale checks
Single and Multiple Cash Flows
Timelines, common valuation dates and uneven payment streamsCash flows at different dates cannot be added until they share a valuation date. This chapter uses timelines to move single amounts and uneven streams forward or backward with matched periodic rates.
- Cash-flow signs from one consistent viewpoint
- Future value of a single cash flow
- Present value of a future receipt
- Multiple uneven cash-flow timelines
- A common valuation date for comparison
- Alternative-date equivalence checks
Annuities and Perpetuities
Ordinary, due and deferred streams with explicit timingAnnuities are finite equal payments, while perpetuities continue without a terminal date. The formulas become reliable when their timing boundary is explicit: an ordinary stream is valued one period before its first payment.
- Ordinary annuity timing
- Annuity-due left shifts
- Deferred annuity boundary values
- Ordinary and due perpetuities
- Level-payment loan amortisation
- Timing and direction controls
Companies and Shareholder Cash Flows
Governance, liability, ownership rights and return channelsCorporations separate the legal entity from its owners and usually separate dispersed ownership from day-to-day control.
- Corporate legal separation
- Dispersed ownership and transferable shares
- Boards, managers and agency problems
- Limited and no-liability shares
- Ordinary and preference rights
- Dividend and capital-gain returns
Dividend Valuation Models
Level, constant-growth and multi-stage dividend forecastsShare value is the present value of expected future cash flows, but the forecast shape determines the model.
- Dividends and future sale prices
- Level-dividend perpetuity
- Constant-growth Gordon model
- Multi-stage dividend forecasts
- Terminal-value timing
- Required-return and growth sensitivity
Debt Valuation and Investment Decisions
Coupon claims, bond yields and present-value project choicesA fixed-coupon bond combines a finite coupon annuity with repayment of face value, while a project combines an initial outlay with incremental future cash flows. Both use present value, but their cash-flow definitions differ.
- Bond coupons and face value
- Coupon rate versus required yield
- Premium, par and discount prices
- Incremental project cash flows
- Net present value decisions
- Cash-flow definition before discounting
Portfolio Risk, Return and CAPM
Diversification, covariance, beta and required returnExpected return describes the centre of a return distribution, while standard deviation describes total dispersion. Portfolios add a second layer: return remains a weighted average, but risk depends on covariance and correlation.
- Expected return and probability weights
- Variance and standard deviation
- Covariance and correlation
- Portfolio diversification
- Systematic risk and beta
- CAPM required return
Forwards and Futures
Linear payoffs, price locks, settlement and basis riskForwards and futures create linear price exposure. A future buyer can go long to offset a price rise, while a future seller can go short to offset a fall.
- Long and short forward obligations
- Delivery price and maturity payoff
- Commercial hedge direction
- No-arbitrage forward pricing
- Futures margin and daily settlement
- Basis, quantity and timing risk
Options and Financial Risk Management
Calls, puts, premiums and asymmetric hedge designOptions add asymmetric protection. A call holder can buy at the strike, while a put holder can sell, and either holder can walk away when exercise is unattractive. The premium pays for that flexibility.
- Call and put exercise rights
- Long and short option positions
- Expiry payoff versus profit
- Intrinsic value and break-even
- Protective puts and purchase calls
- Strike, premium and residual risk
It then develops the time value of money: simple and compound interest, periodic-rate conversion, future value, present value, uneven cash flows, annuities and perpetuities.
Those tools are applied to companies, shares, debt instruments and investment decisions before the course turns to diversification, portfolio theory, CAPM, forwards, futures, options and risk management.
The assessment structure makes both recognition and calculation important. Three closed-book in-tutorial quizzes are each nominally worth 10% and are redeemable against the final examination.
The final is worth at least 70%, can rise to 100% when quiz weight is redeemed, and covers all concepts introduced during the course. It mixes theoretical and numerical questions, so revision should not split formulas from explanations. Every calculation needs a reason for the model, a matched time unit and a decision sentence.
This guide follows that sequence with original examples.
It does not reproduce tutorial or assessment questions. The recurring routine is to classify the claim or exposure, draw its dates or payoff, convert the rate to the cash-flow period, calculate with full precision and test the result by direction and scale. For conduct questions, the same discipline becomes rule, factual trigger, required action and boundary.
For valuation, it becomes cash-flow forecast, risk-consistent return and present value. For hedging, it becomes exposure, adverse price move, offsetting contract and residual risk.
The published final is closed book and held in person. It provides a 15-minute reading period followed by two hours for written answers.
A non-programmable scientific calculator is required; financial calculators, graphics calculators and other electronic devices are not permitted. The captured materials do not publish a section count or per-question mark allocation, so preparation should focus on flexible method rather than an invented paper template.
Worked example · free
Value an uneven project from its cash-flow timeline
- +1Map: put the cost at time zero and the three receipts at the ends of years one, two and three.
- +2Discount: receipt value is $1,200/1.08 + $1,500/1.082 + $2,000/1.083 = $3,984.78.
- +2Compare: NPV is $3,984.78 - $4,000 = -$15.22, so discounted benefits do not recover the cost.
- +1Conclude: reject on the supplied cash flows and required return, while noting that the result is close to zero.
Key terms
- Present value
- Present value is the amount today that is financially equivalent to a future cash flow at a stated required return.
- Future value
- Future value is the amount a current cash flow becomes after compounding for the specified periods.
- Effective rate
- An effective rate measures the actual growth over its stated period after compounding is included.
- Annuity
- An annuity is a finite sequence of equal cash flows paid at regular intervals.
- Perpetuity
- A perpetuity is an equal periodic cash flow that continues without a terminal date.
- Agency problem
- An agency problem arises when delegated decision makers can pursue interests that differ from those of owners.
- Dividend yield
- Dividend yield is the dividend received during a period divided by the opening share price.
- Bond yield
- Bond yield is the return used to discount a bond's promised coupons and principal at market value.
- Portfolio variance
- Portfolio variance combines weighted asset variances with covariance terms that capture co-movement.
- Beta
- Beta measures an asset's sensitivity to market returns within the CAPM framework.
- Forward contract
- A forward contract obliges two parties to exchange an underlying item later at a price fixed today.
- Option premium
- An option premium is the upfront price paid for the holder's asymmetric exercise right.
FINM7006 FAQ
How is the course assessed?
Three in-tutorial quizzes are each nominally worth 10%, and the final examination is nominally worth 70%. The quizzes are redeemable, so each contributes either 0% or 10% and the final may carry more than 70% for an individual student. The published nominal rows sum to 100%.
What is the published final examination format?
The final is closed book, held in person and includes both theoretical and numerical questions across all course concepts. The published timing is 15 minutes of reading and 2 hours of writing. The captured materials do not state a section count, question count or per-question mark allocation.
Which calculator can I use?
The class summary requires a non-programmable scientific calculator for quizzes and the final examination. Financial calculators, graphics calculators, programmable calculators and other electronic devices are not permitted. Practise exponent, root and stored-precision operations on the permitted calculator before the assessment.
How do the redeemable quizzes work?
Each quiz is nominally worth 10% but contributes either 0% or 10% toward the course grade because it is redeemable against the final examination. A redeemed quiz moves effective weight into the final, which is why the final counts for at least 70% and can count for more.
What should go on my formula revision sheet?
Organise formulas by decision rather than alphabetically: rate conversion, single cash flows, annuities and perpetuities, share and bond valuation, portfolio risk, CAPM, forward payoffs and option payoffs. Beside each formula, write its timing condition and one direction check so recall includes interpretation.
Are past final papers included in the available materials?
The available course folder contains lectures, tutorial questions, practice questions and several solutions for the early teaching weeks, but it does not contain a past final, sample final or practice final. The integrated questions in this guide are original and follow the published mix of theory and numerical work.
How difficult is the course in concrete terms?
The workload is cumulative because later valuation and derivatives topics reuse time-value reasoning from the early weeks. The final covers all introduced concepts and may carry more weight through quiz redemption. Difficulty therefore comes from breadth, closed-book recall and the need to interpret before calculating, not from a published failure statistic.
Questions students ask in each FINM7006 chapter
- Why are professional conduct and financial markets taught together?
- Markets allocate capital using information and recommendations, so conduct changes the quality of the allocation decision. A hidden conflict can bias a forecast, weak investigation can undermine the cash-flow inputs, and misrepresentation can distort what investors believe they are buying. Ethics is therefore part of finance analysis, not an unrelated checklist. Chapter 01 · Financial Markets and Professional Conduct
- Why can a lower nominal rate produce a higher effective return?
- The compounding frequency determines how often credited interest begins earning further interest. A slightly lower nominal quote compounded more frequently can therefore create a larger one-year growth factor. Convert both offers to annual effective rates before ranking them, then use the periodic rate that matches the actual cash-flow model. Chapter 02 · Interest Rates and Compounding
- Why can I not simply add cash flows from different years?
- A dollar at one date is not financially equivalent to a dollar at another when the required return is positive. Move every amount to one valuation date by compounding or discounting, then add. The common date makes the values comparable and prevents a later receipt from being treated like immediate cash. Chapter 03 · Single and Multiple Cash Flows
- What is the simplest way to distinguish ordinary and due payments?
- Locate the first payment relative to the valuation date. If it arrives one period later, the stream is ordinary. If it arrives immediately, it is due. Do not classify from the product name alone; rent, loan and scholarship wording can describe different timing depending on the exact dates supplied. Chapter 04 · Annuities and Perpetuities
- Why does separating ownership from control create a finance issue?
- Managers can make decisions using assets owned by shareholders while capturing different private benefits or bearing different costs. That incentive gap can alter investment selection, spending and disclosure, which changes expected cash flows and firm value. Governance mechanisms monitor or align the delegated decision rather than eliminating delegation itself. Chapter 05 · Companies and Shareholder Cash Flows
- Why does the Gordon model use next year's dividend?
- The value is measured immediately before the next dividend stream begins, so the numerator must be the first future payment. If the question gives a dividend just paid, grow it once to obtain the next dividend. Using the old payment misses one growth step and understates value. Chapter 06 · Dividend Valuation Models
- Why do bond prices fall when yields rise?
- An existing bond's promised coupons and principal are fixed. A higher required yield discounts those payments more heavily, reducing their present value. The reverse occurs when yield falls. This inverse relationship assumes the promised cash flows remain unchanged while the market return changes. Chapter 07 · Debt Valuation and Investment Decisions
- Why is portfolio risk not a weighted average of standard deviations?
- Assets move together to different degrees, so covariance contributes to portfolio variance. Expected return is linear in weights, but variance contains squared weights and cross-product terms. Ignoring covariance treats every pair as though their co-movement did not matter and misses the source of diversification benefit. Chapter 08 · Portfolio Risk, Return and CAPM
- Why can a successful hedge show a derivative loss?
- The underlying commercial position should benefit in the state where the hedge contract loses. A future buyer's long forward loses when spot falls, but the physical input becomes cheaper. Judge the combined exposure against the objective, not the derivative leg in isolation. The purpose may be certainty rather than outperformance. Chapter 09 · Forwards and Futures
- What is the difference between option payoff and profit?
- Payoff depends on expiry spot and strike. Profit also includes the premium paid or received and any other stated costs. A long option can have zero payoff and still lose money because its premium is unrecovered. Calculate payoff first, then bring in premium once with the correct sign. Chapter 10 · Options and Financial Risk Management
How to study for the exam
Begin with the calculation spine: periodic rate, timeline, common valuation date and direction check. Rework one single cash flow, one uneven stream, one annuity and one perpetuity without notes, keeping full precision until the final answer. Next attach the method to claims. For shares, identify dividend timing and the transition to stable growth. For bonds, separate coupons from principal and compare coupon rate with yield.
For projects, define incremental cash flows before discounting. Then add risk: calculate a two-asset portfolio, explain the covariance term and use beta only when the question calls for CAPM. Finish with derivatives by drawing the underlying exposure beside the forward or option payoff. Each study session should pair a numerical problem with a short explanation of why the model fits.
Revisit conduct through factual triggers rather than slogans. In the final week, use mixed sets and spend reading time classifying questions before calculating. Because quiz weight can be redeemed into the final, prepare for whole-course coverage rather than treating a quiz topic as finished after its scheduled week.
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