Week2_Financial Mathematics

# Week2_Financial Mathematics - Week 2 A review of financial...

This preview shows pages 1–9. Sign up to view the full content.

Week 2 review of financial mathematics A review of financial mathematics 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
ble of Contents Table of Contents 1. The aim of financial mathematics 2. Interest rate arrangements 2.1 Simple interest 2.2 Compound interest 2.3 Continuous compounding 2.4 Compounding periods 2.5 Nominal vs. Effective interest rates Present and future values of cash flows 3. Present and future values of cash flows 4. Annuities 4.1 Ordinary annuity 4.2 Annuity due 3 Deferred annuity 4.3 Deferred annuity 4.4 Equivalent annuity 2
The aim of financial mathematics 1. The aim of financial mathematics Financial assets give holders rights to received future cash flows Cash flows can be either predetermined in nominal (as opposed to real) values – interest payments, stable dividend payments, or have degrees of uncertainty – future capital gains Intrinsic values of the financial assets are the present values of these future cash flows The intrinsic value should be the equilibrium market price 3

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
The aim of financial mathematics is to enable us to lculate the trinsic values f financial assets and calculate the intrinsic values of financial assets and compare them to the current market prices so as to make appropriate investment decisions Long positions if intrinsic value > market price Short positions if intrinsic value < market price However, divergent assessments of future cash flows would lead to the disagreement of the ‘intrinsic value’ among investors this would lead investors with opposite assessments to trade with each other in the financial market. 4
ble of Contents Table of Contents 1. The aim of financial mathematics 2. Interest rate arrangements 2.1 Simple interest p 2.2 Compound interest 2.3 Continuous compounding 2.4 Compounding periods 2.5 Nominal vs. Effective interest rates 3. Present and future values of cash flows 4. Annuities 4.1 Ordinary annuity 4.2 Annuity due 4.3 Deferred annuity 4.4 Equivalent annuity 5

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Interest rate arrangements 2. Interest rate arrangements The time value of money is often measured by using an interest rate (or discount rate) for a period , which compensates those who defer consumption until later and imposes a charge on those who wish to consume ore now than their income allows more now than their income allows We will use the symbol r to denote the interest rate for a holding period in the following calculations 6
1 Simple interest 2.1 Simple interest terest is calculated only on the initial amount Interest is calculated only on the initial amount invested or principal you invest an initial amount (PV the resent If you invest an initial amount (PV, the present value ) you would accumulate an amount (FV, the ture value equal to the rincipal plus interest future value ) equal to the principal plus interest : FV = PV + interest 7

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
g ANZ pays 10% per annum Future Values (\$) E.g. ANZ pays 10% per annum simple interest.
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 03/09/2012 for the course FINC corporate taught by Professor Kim during the Three '11 term at University of Sydney.

### Page1 / 61

Week2_Financial Mathematics - Week 2 A review of financial...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online