300-203 Mathematics in the Financial World

Coordinator:

Prerequisite/s:

Timetable:

Contact:

Objectives:

On completion of the subject, students will be able to:

• calculate the present value and the accumulated value of a stream of equal or unequal payments using specified rates of interest;

• show how interest rates or discount rates may be expressed in terms of different time periods;

• analyse compound interest problems and solve an equation of value for the implied rate of interest;

• show how discounted cash flow techniques can be used in project appraisal, with an allowance for taxation;

• show an understanding of simple stochastic interest rate models; and

• evaluate the liabilities under a capital redemption contract or annuity certain, in terms of emerging costs and in terms of present values, for the purposes of product pricing and for the purposes of reserving.

Content:

Compound interest functions; valuation of annuities certain; loans repayable by installments; comparison of value and yield of cash flow transactions; valuation of fixed interest securities, with and without tax on interest and capital gains; duration and volatility of securities; introduction to concept of immunisation and matching; consumer credit contracts; introduction to stochastic interest rate models.

Assessment:

Prescribed Texts:

• McCutcheon J J and Scott W, An Introduction to the Mathematics of Finance, Heinemann.