Financial Mathematics – KASNEB Syllabus

PAPER NO.2   FINANCIAL MATHEMATICS

GENERAL OBJECTIVE

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to apply financial mathematics in decision making.

LEARNING OUTCOMES

A candidate who passes this paper should be able to:

  • Compute present and future values of cash flows
  • Apply financial forecasting techniques in business
  • Apply mathematical functions in finance
  • Apply statistical tools in finance
  • Use of probability to solve business problems
  • Compute and interpret index numbers
  • Use of financial calculators to solve financial

CONTENT

 Introduction to financial mathematics

  • Nature and scope of finance; financing, investment, management of working capital and profit sharing (dividend policy) decisions
  • Relationship between finance and other disciplines; finance and economics, finance and accounting, finance and mathematics
  • Purpose of financial modeling

Financial algebra

  • Simultaneous and quadratic equations
  • Developing finance functions
  • Interactive graphs; graphing financial functions
  • Overview of calculator operations: Turning on and off the calculator, selecting second functions, setting calculator formulae, clearing calculator memory, mathematical operations, memory operations, using worksheets

Time value of money and interest rate mathematics

  • Concept of interest rates and inflation
  • Simple interest
  • Compound interest
  • Continuously compounded interest
  • Present values
  • Basics of capital budgeting
  • Loan amortisation
  • Time value of money and amortisation worksheets, entering variables in amortisation worksheets, entering cash inflows and outflows, generating amortisation schedules
  • Cash flow worksheets; calculator worksheet variables for both even and uneven and grouped cash flow, entering, deleting, inserting and computing results
  • Bond worksheets: Bond worksheets variables and terminology, entering bond data and computing results
  • Depreciation worksheets; depreciation worksheet variables, entering data and computing results
  • Other worksheets: Percentage change/compound interest worksheets, interest conversion worksheets, profit margin worksheets, break-even worksheets, memory worksheets

Financial forecasting

  • Need for financial forecasting
  • Techniques of forecasting: statistical and non-statistical methods
  • Time-series components and analysis
  • Share valuation
  • Fixed income models for bonds and construction of yield curves
  • Regression and correlation
  • Use of financial calculators in regression and correlation models, entering data, computing the results and interpretation

Financial calculus

  • Introduction to calculus
  • Differentiation; ordinary and partial derivatives
  • Integration
  • Application of calculus to solve financial problems relating to maximisation of returns and minimisation of costs

Descriptive statistics

  • Measures of central tendency; mean, mode, median
  • Measures of relative standing; quartiles, deciles, percentiles
  • Measures of dispersion; range, mean deviation, variance, standard deviation, coefficient of variation
  • Statistical worksheets;  statistical  worksheet  variables,  computing statistical results                                                             and interpretation

Probability theory

  • Relevance of probability theory
  • Events and probabilities
  • Probability rules
  • Random variables and probability distributions
  • Binomial random variables
  • Expected value
  • Variance and standard deviation
  • Probability density function
  • Normal probability distribution
  • Stochastic functions
  • Application of probability to solve business problems

Index numbers

  • Purpose of index numbers
  • Construction of index numbers
  • Simple index numbers; fixed base method and chain base method
  • Weighted index    numbers;    Laspeyre’s,     Paasche’s,    Fisher’s                    ideal     and             Marshall- Edgeworth’s methods
  • Consumer Price Index (CPI)
  • Use of Consumer Index Price (CPI); inflation, cost of living
  • Limitations of index numbers

Emerging issues and trends



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