intermediate

MAF151

Free study notes for MAF151 (MAF 151), one topic at a time, each with worked examples and a practice quiz.

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Course Syllabus

  1. Introduction to Financial Mathematics and Basic Concepts
  2. Compound Interest
  3. Annuities: Future and Present Values
  4. Loan Amortization and Sinking Funds
  5. Bonds and Their Valuation
  6. Capital Budgeting Techniques
  7. Introduction to Derivatives (Options and Futures)

Study Notes

Introduction to Financial Mathematics and Basic Concepts

  • Compound Interest: This is where interest earns interest. After each period, the interest earned is added to the principal, and the next period's interest is calculated on this new, larger amount. This is how most real-world investments work, and it's incredibly powerful over time.
    • Formula for Future Value: $FV = P (1 + r)^t$
      • $FV$ = Future Value
      • $P$ = Principal
      • $r$ = Annual interest rate (as a decimal)
      • $t$ = Number of compounding periods (usually years, but can be months/quarters if rate adjusted)
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Compound Interest

The key factors are:
* Principal (P): Your starting amount of money.
* Annual Interest Rate (r): The percentage your money grows each year (expressed as a decimal, e.g., 5% is 0.05).
* Number of Times Compounded Per Year (n): How often the interest is calculated and added to the principal within a year (e.g., annually n=1, semi-annually n=2, quarterly n=4, monthly n=12).
* Time (t): The number of years your money is invested or borrowed.

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Annuities: Future and Present Values

An annuity is a fixed series of payments or receipts over a specified period. When these payments occur at the end of each period, it's called an ordinary annuity. If they happen at the beginning, it's an annuity due. We'll focus on ordinary annuities for now, as they're more common in many applications like loan repayments or regular savings.

The future value (FV) tells you how much a series of regular payments will be worth at a specific point in the future, assuming a certain interest rate. Imagine saving the same amount every month; FVA calculates your total savings plus all the interest earned on those savings.

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Capital Budgeting Techniques

Free model

Capital budgeting involves evaluating potential investments that require a significant upfront cost and are expected to generate benefits over several years. You'll learn several techniques, each with its strengths and weaknesses, to help make these decisions.

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Introduction to Derivatives (Options and Futures)

Free model

Derivatives are financial instruments that get their value from an underlying asset. This underlying asset can be almost anything: a stock, a commodity (like oil or gold), an interest rate, or even a currency.

The two main types of derivatives we'll look at are options and futures.

There are two main types of options:
* Call Option: Gives the holder the right to buy the underlying asset. You'd buy a call if you expect the price of the asset to go up.
* Put Option: Gives the holder the right to sell the underlying asset. You'd buy a put if you expect the price of the asset to go down.

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MAF151: common questions

What does MAF151 cover?

This MAF151 study guide covers 7 topics: Introduction to Financial Mathematics and Basic Concepts, Compound Interest, Annuities: Future and Present Values, Loan Amortization and Sinking Funds, Bonds and Their Valuation, Capital Budgeting Techniques, Introduction to Derivatives (Options and Futures).

Are these MAF151 notes free?

Yes. Every MAF151 note on this page is free to read without an account. A free account adds practice quizzes, flashcards and a revision plan.

How do I revise for my MAF151 exam?

Read the MAF151 note for each topic, then take its practice quiz: the questions you get wrong come back as flashcards until you know them. Save the course to get a revision plan built around your exam date.