Document Type

Syllabus

Publication Date

Spring 2024

Course Description

Interest is defined as the compensation that a borrower of capital pays to a lender of capital for its use. Thus, interest can be viewed as a form of rent that the borrower pays to the lender to compensate for the loss of the use of the capital by the lender while it is loaned to the borrower. Chapters 1-7 are about the mathematical theory of interest on a deterministic basis. Chapter 10 covers the term structure of interest rates with an expanded consideration of spot rates, forward rates, relationship with bond yields. Chapter 11 covers important techniques in the management of assets and liabilities, such as duration, convexity, and immunization. In addition, this course covers 85% of the material in SOA Exam FM/CAS Exam 2. The other 15% is about Asset Liability Management and other topics will be covered in Math 332. Math 332 will also have advanced problems for practice to prepare for SOA Exam FM/CAS Exam 2.

Student Outcomes

After students complete this course, they will demonstrate the ability to 1. Define and recognize concepts related to the time value of money, and do calculations involving the terms of interest rate (rate of interest), simple interest, compound interest, accumulation function,future value, current value, present value, net present value, discount factor, discount rate (rate of discount), convertible m-thly, nominal rate, effective rate, inflation and the real rate of interest, the force of interest, equation of value. 2. Define and recognize concepts related to annuities and cash flows, and do calculations involving the terms of annuity-immediate, annuity due, perpetuity, payable monthly or payable continuously, level payment annuity, arithmetic increasing/decreasing annuity, geometric increasing/decreasing annuity, term of annuity. 3. Define and recognize concepts related to loans, and do calculations involving the terms of principal, interest, term of loan, outstanding balance, final payment (drop payment, balloon payment), amortization. 4. Define and recognize concepts related to bonds, do calculations involving the terms of price, book value, amortization of premium, accumulation of discount, redemption value, par value/face value, yield rate, coupon, coupon rate, term of bond, callable/non-callable. 5. Define and recognize concepts related to general cash flows and portfolios, and do calculations involving the terms of yield rate/rate of return, dollar-weighted rate of return, time-weighted rate of return, current value, duration (Macaulay and modified), convexity (Macaulay and modified), portfolio, spot rate, forward rate, yield curve, stock price, stock dividend. 6. Define and recognize concepts related to immunization, and do calculations involving the terms of cash flow matching, immunization (including full immunization), Redington immunization.

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