Financial Mathematics Concepts

Time value of money, interest theory, annuities, bonds, and financial derivatives.

Key Concepts

• •Time value of money: present value, future value, and the relationship between them
• •Interest rates: simple, compound, effective, nominal, and force of interest
• •Annuities: immediate, due, deferred, increasing, decreasing, and perpetuities
• •Loans: amortization schedules, sinking funds, and outstanding balance calculations
• •Bonds: pricing, premium/discount, callable bonds, and yield calculations
• •Duration and convexity: measuring and managing interest rate risk
• •Immunization: Redington and full immunization strategies for ALM
• •Derivatives: forward contracts, futures, options, put-call parity, and swaps
• •Term structure: spot rates, forward rates, and yield curve construction
• •Portfolio returns: dollar-weighted and time-weighted rates of return

Study Tips

• 1.Master the timeline approach: draw cash flows on a timeline before computing present values.
• 2.Learn to convert between interest rate types quickly (effective, nominal, force of interest).
• 3.Practice annuity calculations until the formulas are second nature.
• 4.Use your financial calculator (BA II Plus) efficiently for bond and loan problems.
• 5.Understand immunization conceptually before memorizing conditions.

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