Serena Khan, a fictional analyst at an investment management firm, was tasked with evaluating a potential investment in Robinhood Markets, Inc. in March 2023. Known for its sleek interface and zero-commission trades, Robinhood aimed to "democratize finance" by making investment products widely accessible. The company saw a surge in users during the COVID-19 pandemic but came under fire for its role in the meme-stock craze and its revenue model based on payment for order flow. Robinhood had struggled since its 2021 IPO as the number of active users declined and shares fell over 80% from their highs. This case encourages students to explore key themes relevant to a broad range of fintech companies and provides an opportunity to discuss the role of wholesale market makers in trade execution, the economics of PFOF, and the gamification of investing.
In September 2017, a senior portfolio manager at Portland Capital Management had all her attention focused on the upcoming initial public offering (IPO) of Roku, Inc. The company had just updated its initial filing to indicate an offer price between $12 and $14, and Portland Capital Management had an opportunity to take a substantial position in that offering. She saw the upside potential in Roku's shift from hardware-related revenue streams (player sales) to platform-related revenue streams (advertising and content purchases made on the platform). But she was also well aware of the riskiness of this strategy and the uncertain state of IPO markets at that time.
This note explores the first principles of pricing financial contracts. Debt contracts go by many names, but the term bond is used in this note to denote any market-traded debt contract. The note is divided into three sections. The first section examines the simplest of financial contracts-the zero-coupon risk-free bond contract. The second section examines bonds with the additional complexity of coupon payments. The third section examines the expectations theory, the fundamental theory for why yields vary over different maturities, and introduces the construct of a yield curve. The basic concepts and principles associated with the risk-free bonds discussed in this note provide an important foundation for understanding more complex securities.