KC6001 - Financial Mathematics

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What will I learn on this module?

The module introduces the concepts and terminology of financial mathematics and modelling in finance. You will learn about
the properties of interest rates and the key tools of compound interest functions for modelling a range of annuity schemes. The module develops models for life insurance and endowment schemes and enables the students to analyse the behaviour of share prices. The generalised cash-flow model is introduced to describe financial transactions. The student learns how to develop simple models of financial instruments such as bonds and shares.


Outline Syllabus

Interest: Simple and compound interest. Effective and nominal interest rates. Force of interest. Interest paid monthly. Present values. Cash flows and equations of value.
Annuities: Annuities with annual payments, and payments more regularly. Payments in arrear and in advance. Deferred and varying annuities, annuities payable continuously. Loans, loan structure and equal payments.
Discounted cash flow: Generalised cash flow model. Project appraisal at fixed interest rates. Comparison of two investment projects. Different interest rates for lending and borrowing. Payback periods. Measurement of investment performance.
Investments: Types of investments. Valuation of fixed interest securities and uncertain income securities. Real rates of interest. Effects of inflation. Capital gains tax.
Arbitrage in financial mathematics: Forward contracts. Calculating delivery price and delivery value of forward contracts using arbitrage-free pricing methods. Discrete and continuous time rates.
Life Insurance: Term insurance and whole life insurance. Curtate future lifetime. Life tables, expectation of life. Annual and monthly premium. Endowments. Payment at death.
Stochastic Interest Rates: Varying interest rates. Independent rates of return. Expected values. Application of the lognormal distribution. Brownian motion.

How will I learn on this module?

You will learn through through a combination of lectures and skills periods focussing on problem solving where you will be able to obtain help. Lectures allow students to experience and understand the formalism of the required mathematical techniques as well as include relevant examples and guided in-class exercise-solving sessions between more theoretical expositions. Students have an opportunity to enhance their understanding of the subject through exercises which promote both independent learning and problem solving within peer groups. The exercise classes will also be an opportunity to present you with open research problems, and will strengthen your transferable skills and employability. Northumbria’s computer labs and facilities are fully equipped with the latest industry-standard software such as Matlab, Excel and others, which will be used to support independent study and learning. Further technology-enhanced resources such as e-lecture notes, seminar sheets with answers and solution and past-paper questions will be provided via the e-learning portal.

How will I be supported academically on this module?

In addition to academic contact with the module team during lectures and exercise classes , students are encouraged to develop their curiosity by making direct contact with the module team either via email or the open door policy operated throughout the programme. Students will also be regularly referred to supporting resources including relevant texts and relevant multimedia materials. References to these resources will be made available through the e-learning portal and in lectures and seminars.

What will I be expected to read on this module?

All modules at Northumbria include a range of reading materials that students are expected to engage with. The reading list for this module can be found at: http://readinglists.northumbria.ac.uk
(Reading List service online guide for academic staff this containing contact details for the Reading List team – http://library.northumbria.ac.uk/readinglists)

What will I be expected to achieve?

Knowledge & Understanding:
1. Apply equation of value in the context of the discounted cash flow model (KU1);
2. Compose appropriate models for valuating securities (KU2, KU3);
3. Understand and apply the theory of interest rates (KU3).

Intellectual / Professional skills & abilities:
4. Perform project appraisal and evaluate the performance of the project/company on a stock market (IPSA1, IPSA2, IPSA3).

Personal Values Attributes (Global / Cultural awareness, Ethics, Curiosity) (PVA):
5. Increases proficiency and independence in exploiting rigorous mathematical techniques to study economical and financial problems (PVA1, PVA3, PVA4).

How will I be assessed?

SUMMATIVE
1. Course Work in the form of individual Assignment (30%) – 1, 2, 3, 4, 5
2. Final exam (70%) – 1, 2, 3, 4, 5

FORMATIVE
Exercise Classes – 1, 2, 3, 4, 5

Students will be assessed by two formal assessments with weights 30% (coursework) and 70% (exam) respectively. The examinations will cover all topics from the module.

Formative feedback will be provided on seminar work which will include problems designed to aid student understanding.

Pre-requisite(s)

None

Co-requisite(s)

None

Module abstract

The module will introduce you to the concepts and terminology of financial mathematics and modelling in finance. You will learn properties of interest rates and the key tools of compound interest functions for modelling a range of annuity schemes. The module develops models for life insurance and endowment schemes and enables the students to analyse the behaviour of share prices. The generalised cash-flow model is introduced to describe financial transactions. You will learn how to develop simple models of financial instruments such as bonds and shares, enhancing skills that are essential to your future careers and/or postgraduate study. You will be assessed by course work in the form of individual Assignment (50%) and by a written, closed-book examinations. The examination will cover all topics from the module.

Course info

UCAS Code G101

Credits 20

Level of Study Undergraduate

Mode of Study 4 years full-time or 5 years with a placement (sandwich)/study abroad

Department Mathematics, Physics and Electrical Engineering

Location City Campus, Northumbria University

City Newcastle

Start September 2020

Fee Information

Module Information

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