• Simple and compound interest. Time value of money. Rate of interest, rate of discount, and force of interest. Accumulated values and discounted values. Accumulation and discounting of a (possibly infinite) cash flow to a given time, where both the rate of cash flow and the force of interest may be time-varying.
• Relationships between rates of interest and discount over different time periods. Nominal rates, effective rates, rates payable multiple times per annum.
• Definition of the standard compound interest functions and relationships between them.
• Generalised cash flow modelling. Equation of value for a cash flow problem, and methods of solution.
• Loans. Equation of value corresponding to periodic repayment of a loan. Interest and capital content of annuity payments where the annuity is used to repay a loan. Consumer credit transactions. Annual Percentage Rate of Charge (APR).
• Net present value (NPV), accumulated profit, and internal rate of return (IRR) for investment projects.
• Investment project appraisal using NPV and IRR. Real rate of return in presence of inflation.
• Behavioural economics. Expected utility theory, prospect theory, framing, heuristics, and biases. The Bernartzi and Thaler solution to the equity premium puzzle.
• Ordinary shares. Constant dividend growth model of share valuation. Fixed-interest securities. Present value and redemption yield for a fixed-interest security, including effects of taxation.
• Yield curves and the term structure of interest rates.
• Investment and risk characteristics of standard asset classes (Government fixed-interest securities, other fixed-interest securities, equities, etc.) available for investment purposes.
• Discounted mean term, volatility, convexity. Matching of assets and liabilities, immunization.
• Simple stochastic interest rate models. Mean, variance, and distribution function for the accumulated amount of an initial investment, and applications.
• Spot and forward interest rates. Forward contracts. The concept of no-arbitrage pricing and its use in determining the fair value of a forward contract.