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Handbook Of Financial Mathematics 3rd Edition Vol 1

Handbook Of Financial Mathematics 3rd Edition Vol 1

ISBN: 978 1 85564 741 1

No. of Pages: 301

Author(s): Peter Cartledge

Publisher: Euromoney Books

A Handbook of Financial Mathematics and Financial Arithmetic: A Practitioner's Guide. Built around practical worked examples, both volumes take a step-by-step approach to understanding the mathematical underpinnings and implications of all types of deals and instruments.
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This two-volume set is the updated and expanded edition of Peter Cartledge's best-selling manuals A Handbook of Financial Mathematics and Financial Arithmetic: A Practitioner's Guide.

Built around practical worked examples, both volumes take a step-by-step approach to understanding the mathematical underpinnings and implications of all types of deals and instruments. Both volumes include practical worked examples for the HP19BII and HP17BII calculators. Detailed yet practical, these books are a must for all who have any dealings with financial instruments.

Vol. 1 - Bond and Money Markets examines and explains the mathematics of: money rates, CDs, bills, promissory notes, repos bond pricing, yields and yield curves frequency and convention issues project arithmetic, leasing, IRR, NPV floating rate securities hedging and risk management in fixed income structures duration, modified duration/volatility convexity and cash-flow dispersion (301 pages).

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Table of Contents

The Handbook of Financial Mathematics, 3rd Edition

Volume 1: Mathematics for bond and money markets

Chapter 1: Introduction 1

So how good do you need to be at mathematics? 1

Calculating present or future values 4

Day-count formulae 6

Compound interest formulae 7

Chapter 2: Day count and accrual calculations 15

The need for precision 15

The conventions 16

Notes on the HP17BII 24

Day-count adjustment 25

Chapter 3: Simple interest calculation 29

What are yields and discounts? 29

Chapter 4: Accumulated value: yield-based calculations 31

Present value: yield based calculations 32

Present value: discount-based calculations 36

Accumulated value: discount based calculations 37

Yield to discount conversion 39

Simple holding period return 40

Chapter 5: Money market products and their arithmetic 43

Time deposits 43

Certificates of deposit 48

Bills of exchange 43

Promissory notes 56

Sale and repurchase agreements (REPOS) 56

Chapter 6: Compound interest calculations 59

Introduction 59

Powers and roots 60

Compounded accumulated value 61

Compounded present value 65

Nominal and effective rates of return 70

Chapter 7: Fixed-income yield and price 75

Yield 75

Pricing methodology given yield to maturity 77

Fractional coupon periods CDs 86

Chapter 8: Floating-rate securities 89

Price behaviour in floaters 89

Yield evaluation methods 91

Chapter 9: Yield curves 97

Definitions 98

Shapes and shifts 100

The rationale behind the different shapes 103

The effects of credit risk and inflation risk 103

Deriving yield curves from market rates and vice versa 107

Yield to call and put calculations 117

Coupon stripping 118

Chapter 10: Annuities due 125

Annuity equations 125

Future value of an annuity 126

Present value of an annuity 128

Annuity value of an annuity 129

Annuities due 130

Chapter 11: Personal lending and retail financial products 135

General structure 135

Short-term loans 137

Long-term loans 144

Chapter 12: Internal rate of return and net present value 151

Combined uses of the measures 151

Other uses of IRR and NPV 156

Profit and loss calculations 158

Chapter 13: Average and equivalent life 161

Average life 161

Yield to average life 162

Yield to equivalent life 162

Equivalent life 163

Chapter 14: Duration 165

Introduction 165

The basic concept 167

Price sensitivity 170

Using duration to manage reinvestment and interest rate risk 171

What affects duration? 172

Summary 175

Chapter 15: Modified duration and PVBP 177

Definition and scope of modified duration 177

Modified duration as a hedging tool 179

A portfolio case study 181

Present value of a basis point (PVBP) 183

What of large changes in yield? 183

Chapter 16: Cashflow criteria 185

Cashflow planning 185

Portfolio duration 188

Immunisation by using a duration-based strategy 189

Chapter 17: Convexity 193

What is convexity? 193

Calculating convexity 194

Why convexity is important 198

Convexity price predictor 203

Hedging using convexity 205

Chapter 18: The HP17BII and HB19BII calculators 207

RPN or algebraic notation? 207

Using the calculator built-in functions 209

Duration measures in bonds and projects 219

Programming 223

Postscript-Financial Derivatives 229

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Authors

Peter Cartledge runs his own independent treasury and capital markets training and consultancy, Sigma Associates, following a career with Midland Montagu, formerly the investment and international banking division of the Midland Bank Group.

From 1985, he was Head of Midland Montagu Treasury and Capital Markets Training with responsiblilty for training Midland Montagu’s dealers, account managers and support staff at all levels throughout Midland Bank Group worldwide, in treasury and capital markets skills. Before his departure from Midland Montagu, he was Senior Manager, Treasury Skills Consultancy, in the bank’s financial Engineering Group, where as a technical treasury consultant he designed and ran a comprehensive external treasury training programme for clients as well as acting an internal and external technical treasury consultant for the bank.

Peter Catrlege’s earlier career included a period of seven years in corporate foreign exchange dealing and in-depth experience in international trade and export finance. He has extensive experience of running seminars in the United Kingdom, Continental Europe, North America, Africa and the Middle and Far East. Publications include A Handbook of Financial Mathematics published by Euromoney Publications in 1991 and was a major contributor to the Foreign Exchange Manual published by Woodhead Faulkner in 1990.

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