Module Catalogues

Theory of Interest

Module Title Theory of Interest
Module Level Level 1
Module Credits 5.00
Academic Year 2021/22
Semester SEM2

Aims and Fit of Module

Students gain a thorough understanding of the quantitative applications of interest and related functions. Students are required to understand how to price various financial instruments for different interest.

Learning outcomes

A. Classify and calculate all kind of rates of interest, find the future value and present value of a cash flow, and write the equation of value given a set of cash flows and an interest rate.
B. Derive formulae for all kinds of annuities; classify the notation of annuities and formulas for the present value of financial derivatives
C. Calculate the outstanding balance at any point in time
D. Calculate a schedule of repayments under a loan and identify the interest and capital components in a given payment; Given the quantities, except one, in a sinking fund arrangement calculate the missing quantity; Calculate the present value of payments from a fixed interest security, bounds for the present value of a redeemable fixed interest security;
E. Given the price, calculate the running yield and redemption yield from a fixed interest security
F. Calculate the present value or real yield from an index-linked bond
G. Calculate the price of, or yield from, a fixed interest security where the income tax and capital gains tax are implemented
H. Calculate yield rate, the dollar-weighted and time weighted rate of return, the duration and convexity of a set of cash flows

Method of teaching and learning

This module is delivered through formal lectures and tutorial classes