This module is not currently running in 2023 to 2024.
The aim of this module is to provide a grounding in financial mathematics and its simple applications. The idea of interest, which may be regarded as a price for the use of money, is fundamental to all long-term financial contracts. The module deals with accumulation of past payments and the discounting of future payments at fixed and varying rates of interest; it is fundamental to the financial aspects of Actuarial Science. The syllabus will cover: Generalised cashflow models, the time value of money, real and money interest rates, discounting and accumulating, compound interest functions, equations of value, loan schedules, project appraisal, investments, elementary compound interest problems, arbitrage free pricing and the pricing and valuation of forward contracts, the term structure of interest rates, stochastic interest rate models.
Marks on this module can count towards exemption from the professional examination CT1 of the Institute and Faculty of Actuaries. Please see http://www.kent.ac.uk/casri/Accreditation/index.html for further details.
48 hours of Lectures and Examples classes.
80% Examination, 20% Coursework
Adams, A. T., et al, Investment mathematics – (Wiley 2003)
McCutcheon, J. J., Scott, W. F., An introduction to the Mathematics of Finance – (Institute of actuaries, Faculty of Actuaries in Scotland 1986)
Garrett S – An introduction to the Mathematics of Finance; a deterministic approach – 2nd edition (Institute and faculty of Actuaries 2013)
See the library reading list for this module (Canterbury)
On successful completion of the module, students will be able to:
a. Describe how to use a generalized cashflow model to descried financial transactions, making allowances for the probability of payment.
b. Describe how to take into account the time value of money using the concepts of compound interest and discounting.
c. Show how interest rates or discount rates may be expressed in terms of different time periods.
d. Demonstrate a knowledge and understanding of real and money interest rates
e. Calculate the present value and the accumulated value of a stream of equal or unequal payments using specified rates of interest and the net present value at a real rate of interest, assuming a constant rate of inflation.
f. Define and use the more important compound interest functions including annuities certain.
g. Define an equation of value.
h. Describe how a loan may be repaid by regular instalments of interest and capital.
i. Show how discounted cashflow techniques can be used in investment project appraisal.
j. Describe the investment and risk characteristics of typical assets available for investment purposes.
k. Analyse elementary compound interest problems.
l. Calculate the delivery price and the value of a forward contract using arbitrage free pricing methods
m. Show an understanding of the term structure of interest rates.
n. Show an understanding of simple stochastic interest rate models.
o. Appreciate recent developments in Financial Mathematics and the links between the theory of Financial Mathematics and their practical application
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