ACS 1540 - Financial Mathematics II

• Define and recognize the terms: cash flow matching, immunization (including full immunization), Redington immunization
• Construct an investment portfolio to: Redington immunize a set of liability cash flows; fully immunize a set of liability cash flows; exactly match a set of liability cash flows
• Define and recognize the terms: swap rate, swap term or swap tenor, notional amount, market value of a swap, settlement dates, settlement period, counterparties, deferred swap, amortizing swap, accreting swap, interest rate swap net payments
• Given sufficient information, calculate the market value, notional amount, spot rates or swap rate of an interest rate swap, deferred or otherwise, with either constant or varying notional amount
• Define and recognize the components of interest rates including real risk-free rate, inflation rate, default risk premium, liquidity premium, and maturity risk premium
• Explain how the components of interest rates apply in various contexts, such as commercial loans, mortgages, credit cards, bonds, and government securities
• Explain the roles of the Federal Reserve and the FOMC in carrying out fiscal policy and monetary policy and the tools used by the Federal Reserve and the FOMC including targeting the Federal Funds rate, setting reserve requirements, and setting the discount rate
• Explain the theories of why interest rates differ by term, including liquidity preference (opportunity cost), expectations, preferred habitat, and market segmentation
• Explain how interest rates differ from one country to another (e.g., U.S. vs. Canada)
• Identify the real interest and the nominal interest rate in the context of loans with and without inflation protection and calculate the effect of changes in inflation on loans with inflation protection

• Financial Mathematics I topics

• General derivatives
• Hedging and investment strategies
• Forwards and futures
• Swaps