ECO349H5 Money, Banking & Financial Markets
The Complete Exam Bible · Fall 2026ECO349H5 Overview
- Fall 2026
- University of Toronto
- Level 3 Economics
- Three-hour final exam
What this course asks you to do
ECO349H5 develops models of money, financial instruments and institutions, then uses them to evaluate market evidence and policy.
- Price the promise Keep cash-flow timing separate from market structure.
- Show the mechanism Write constraints before comparative statics.
- Protect direction Audit price, yield, risk and reserve signs.
- Qualify policy Name the margin improved and the incentive created.
How ECO349H5 is assessed
| Component | Weight | Format |
|---|---|---|
| Midterm | 25% | In-class midterm exam, October 20, 2026 |
| Assignments | 20% | Four group assignments; lowest score dropped |
| Participation | 15% | Attendance, engagement and course participation |
| Final Exam | 40% | Three-hour cumulative exam with greater post-midterm emphasis |
The Fall 2026 syllabus weights total 100%. The 15% participation grade is not automatically awarded; it incorporates attendance and engagement, including the listed course activities, so missing them can reduce that component. This is a participation-grade condition; the source does not state a separate course pass hurdle. The current materials do not publish a section-by-section final format.
What ECO349H5 covers
Nine chapters follow the Fall 2026 teaching sequence from financial assets to bank regulation.
Financial Assets and the Financial System
Classify claims, map balance sheets and distinguish payoff from valueClaims across time
Financial assets divide future goods and monetary payoffs between parties. A useful first question is whether the exchange ends today or creates a claim that remains open. A spot purchase transfers the good and payment together.
- Financial claims
- Balance sheets
- Debt and equity
- Payoff schedules
- Savers and borrowers
Bond Pricing and Market Microstructure
Discount cash flows and compare auctions, exchanges and bilateral tradeCash flows before yields
A bond is a dated sequence of promised payments. Record face value, coupon amount, payment frequency and maturity before selecting an equation. A zero-coupon claim has one maturity payment.
- Present value
- Coupon bonds
- Yield to maturity
- Bond auctions
- OTC liquidity
Yield Curves and Macroeconomic Signals
Decompose level, slope, expectations and term premiaMany maturities, one date
A yield curve compares annualized yields for comparable claims from one issuer at one observation date.
- Yield curve
- Term spread
- Expectations hypothesis
- Term premium
- Curve inversion
Risk Premia and Equity Valuation
Price state-contingent cash flows and interpret equity multiplesValue depends on the state
A risky cash flow is valuable not only because of its average size but because of the states in which it arrives.
- Stochastic discount factor
- Equity premium
- Covariance
- CAPM beta
- Gordon growth
Money Demand and Inflation
Join the equation of exchange to money demand and intergenerational choiceIdentity, behaviour and equilibrium
The equation of exchange places the money stock times velocity on one side and the price level times real output on the other.
- Equation of exchange
- Velocity
- Liquidity preference
- OLG money
- Seigniorage
Payment Systems and Cryptocurrency
Trace ledger verification, double spending and reserve-backed redemptionVerification before valuation
A payment system updates claims after an exchange.
- Payment ledgers
- Blockchain validation
- Double spending
- Stablecoins
- Settlement finality
Information Frictions and Credit Contracts
Separate incentive compatibility, participation and financing feasibilityProfitable does not mean financeable
A project can have positive expected surplus yet fail to attract outside finance.
- Moral hazard
- Incentive compatibility
- Participation constraints
- Pledgeable income
- Bank monitoring
Liquidity Transformation and Bank Runs
Connect reserve gaps, costly liquidation and self-fulfilling withdrawalsPooling, liquidation and belief
Banks transform liquid short-term claims into funding for longer-lived assets. Depositors value access before the assets naturally mature, while the asset side may deliver more only if held to completion.
- Maturity transformation
- Reserve share
- Liquidation haircut
- Sequential service
- Run equilibrium
Bank Competition, Regulation and Stability
Compare lending access, margins, portfolio risk and safeguardsAccess and stability on different margins
Competition among banks can improve borrower access and reduce lending margins, yet its effect on stability depends on how banks respond.
- Cournot competition
- Net interest margin
- Portfolio risk
- Reserve ratio
- Capital adequacy
The Fall 2026 sequence begins with financial claims and balance sheets, moves through bond and equity valuation, builds theories of money and payment systems, and then studies information frictions, liquidity transformation, bank runs and regulation.
The technical work uses optimization, linear equations, expectations and probability, but the published emphasis remains economic interpretation.
The 15% participation grade is not automatically awarded. It incorporates attendance and engagement, including the activities specified in the syllabus; missing them can reduce the participation component even though the assessment table carries no hurdle badge.
This is a participation-grade condition; the source does not state a separate course pass hurdle.
How the chapters fit together
The first chapters ask what a claim promises, how its dated cash flows are priced and how trading rules affect observed prices. Yield curves and risky-asset pricing add beliefs, covariance and macroeconomic expectations.
Money chapters connect aggregate identities to household choice and ledger design. Banking chapters explain why hidden action and uncertain liquidity create a role for intermediaries, then show how competition and safeguards change risk.
How to prepare for the cumulative final
The final is worth forty percent, lasts three hours and covers the course cumulatively with greater post-midterm emphasis.
Rebuild models from constraints rather than memorizing final formulas. For every graph or equation, practise one changed condition and explain the first result that moves. Prior papers reward supported calculations, organized reasoning and explicit assumptions; use that standard for original practice without assuming a prior section layout will be repeated.
Worked example · free
Reprice a zero-coupon claim
- 2Write the zero-coupon pricing relation.
- 2Substitute and solve the annual yield.
- 2State and explain the inverse price response.
Key terms
- Financial Asset
- A financial asset is a legal claim on future goods or services.
- Yield to Maturity
- Yield to Maturity is the constant discount rate that equates promised bond cash flows with price.
- Term Premium
- A Term Premium is compensation attached to holding maturity risk beyond expected short rates.
- Stochastic Discount Factor
- A Stochastic Discount Factor weights payoffs by discounted marginal value across states.
- Equity Risk Premium
- An Equity Risk Premium is expected equity return above the reference bond return.
- Money Demand
- Money Demand is the desired stock of monetary balances at given income, prices and opportunity cost.
- Payment System
- A Payment System is infrastructure that verifies and records transfers of money ownership.
- Incentive Compatibility
- Incentive Compatibility means the intended action gives the decision maker at least as much payoff as deviations.
- Pledgeable Income
- Pledgeable Income is the project payoff that can be promised without destroying incentives.
- Maturity Transformation
- Maturity Transformation funds long illiquid assets with short liquid claims.
- Bank Run
- A Bank Run is a withdrawal surge that can force asset liquidation and reinforce beliefs.
- Capital Ratio
- A Capital Ratio measures loss-absorbing capital relative to a defined asset base.
ECO349H5 FAQ
What makes the course difficult before the final?
The final carries forty percent and is cumulative, while the course requires both mathematical derivation and economic evaluation. Students must keep timing, uncertainty, market clearing and institutional detail aligned rather than relying on isolated formulas. The published materials emphasize succinct, supported reasoning over long unsupported answers.
What is the published final format?
The Fall 2026 materials state that the final lasts three hours, is cumulative and places greater weight on post-midterm content. They do not publish a current section count or question-type split. Prior midterms can guide practice style but should not be treated as the final blueprint.
How should bond pricing be revised?
Draw the cash-flow timeline, discount every payment on the matching period basis, and distinguish coupon rate, current yield and yield to maturity. Then add issuer risk, liquidity and trading protocol only after the contractual value calculation is clear.
How do yield curves connect to the economy?
The course model connects yields across maturities to expected short rates, growth and a term premium. Interpret level, slope and curvature separately, identify the maturities used in a spread, and avoid treating the curve as a certain forecast of future output.
Why do banks exist in these models?
Banks can monitor and screen borrowers, pool resources, transform maturities and provide payment services. Those functions mitigate information and liquidity frictions, but they also create leverage, run exposure and regulatory tradeoffs that must be analyzed rather than assumed away.
Are cryptocurrency questions mainly technical?
No. The economic task is to compare verification, security, access, efficiency, privacy, issuance and redemption. Blockchain mechanics matter because they shape incentives and settlement, but the answer should identify the liability and institutional trust structure before praising or criticizing the technology.
How does attendance affect the course grade?
The 15% participation grade is not automatically awarded. The syllabus says it incorporates attendance and engagement, including the specified course activities; missing them can therefore reduce the participation component. This is a participation-grade condition, and the source does not state a separate course pass hurdle.
Questions students ask in each ECO349H5 chapter
- How is a financial asset different from a real asset?
- A financial asset is a claim on future resources delivered by another party, while a real asset can provide services directly. Some contracts reference real assets, but the payoff promise and the underlying object still perform different economic roles. Chapter 01 · Financial Assets and the Financial System
- Why do bond prices fall when yields rise?
- With promised cash flows fixed, a higher discount rate reduces their present value. The inverse relation is mechanical inside the valuation formula, while the economic reason for the yield change may involve expectations, risk or liquidity. Chapter 02 · Bond Pricing and Market Microstructure
- What does an upward yield curve mean?
- It can reflect higher expected future short rates, positive term premia or both. The interpretation requires a model and comparable securities; the positive slope alone is not an identity about future economic growth. Chapter 03 · Yield Curves and Macroeconomic Signals
- Why is covariance central to risk premia?
- A payoff that is low when marginal utility is high provides poor insurance and must offer compensation. Variance alone cannot show whether the claim performs badly in economically valuable states. Chapter 04 · Risk Premia and Equity Valuation
- Is MV = PY itself a theory of inflation?
- No. It is an accounting relation until assumptions specify velocity, output and money behaviour. A forecast such as proportional price growth requires those additional conditions. Chapter 05 · Money Demand and Inflation
- Is blockchain a store-of-value payment system?
- The course treats blockchain as a decentralized account-based ledger because ownership transfers are verified against recorded balances. A token may also be held as a store of value, but that use is separate from the ledger architecture. Chapter 06 · Payment Systems and Cryptocurrency
- Why can a positive project be denied finance?
- The entrepreneur must retain enough upside to choose effort, which limits the income promised to investors. If pledgeable income cannot cover outside funding at its opportunity cost, the contract fails despite positive total surplus. Chapter 07 · Information Frictions and Credit Contracts
- Why do banks hold reserves?
- Reserves meet early withdrawals without destroying long projects. Holding too much sacrifices long returns, while holding too little exposes the institution to costly liquidation under normal demand. Chapter 08 · Liquidity Transformation and Bank Runs
- Why can more banks increase risk taking?
- Entry compresses net margins in the model, reducing the value preserved by a successful safer portfolio. The marginal cost of risk falls relative to its upside, though the result depends on the specified payoff and liability structure. Chapter 09 · Bank Competition, Regulation and Stability
How to study for the exam
Build a weekly sheet with four columns: economic object, constraint or identity, equilibrium condition, and interpretation. Re-derive one model without notes, change one parameter, and explain which equation moves first. Alternate numerical work with short institutional comparisons.
Before the final, connect bond pricing to yield curves, money returns to inflation, credit incentives to intermediation, and reserve choices to run risk. Confirm current operational instructions through official University channels.
Your AI Economics tutor for ECO349H5
Stuck on a hard ECO349H5 question? Sia is AskSia’s AI Economics tutor — ask any ECO349H5 Money, Banking & Financial Markets question and get a clear, step-by-step explanation grounded in how the course is actually taught and assessed. Read this whole study guide free, then take your hardest questions to Sia.
