Compound interest functions; valuation of annuities certain; loans repayable by instalments; 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.

To achieve an understanding of and facility in:

• Cashflow models. Simple and compound interest. Accumulated and present values.
• Nominal and effective rates of interest and discount, and the force of interest.
• Introduction to annuities and their valuation. Perpetuities. Continuous, increasing, decreasing and indexed annuities.
• Equations of value. Introduction to linear interpolation and annuity tables. Dealing with inflation.
• Loan valuation and payments.
• Capital budgeting including NPV, IRR and DPP. Measuring investment performance. TWRR and MWRR.
• Valuation of fixed interest securities, with and without tax on interest and capital gains. Calculating yields. Allowing for callable features and inflation. Extending to property and share valuation.
• Arbitrage and valuation of forward contracts. Yield curve and term structure of interest rates. Calculating forward and spot rates.
• Interest rate risk: duration, effective duration and convexity. Conditions for and determination of immunisation.
• Introduction to stochastic interest rate models.

• In-class Quizzes : 30%

• Final examination: 70%

Three contact hours per week plus at least 7 hours private study time.

Completion of STAT1008 Quantitative Research Methods or STAT1003 Statistical Techniques

Please refer to Course Website