Course Outline

THE UNIVERSITY OF HONG KONG
DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE

STAT1802/2902 Financial Mathematics
(2017-2018)
Instructor: Prof. K.C. Yuen

Office: RR231 E-mail: kcyuen@hku.hk Tel: 3917 1915
Lecture Times: Monday 9:30 – 11:20 at LE6
Thursday 9:30 – 10:20 at LE6
Instructor’s office Hours: Monday and Thursday 15:00 – 17:30
Tutor: Ms SHAO Chenxi E-mail: cxshao@hku.hk
Tutorial: 1 per week, arranged by tutor
Course Contents
This course covers measurement of interest; annuities certain; discounted cash flow analysis;
yield rates; amortization schedules and sinking funds; bonds and related securities; practical
applications such as real estate mortgage and short sales; stochastic approaches to interest; and
key terms of financial analysis such as yield curves, spot rates, forward rates, forward contract,
futures contract, hedging, duration, volatility, convexity, immunization.
Course Objectives and Learning Outcomes

This course introduces the fundamental concepts of financial mathematics which plays an im-
portant role in the development of basic actuarial techniques. Practical applications of these
concepts are also covered. On successful completion of the course, students should be able to:
1. understand basic concepts of financial mathematics.
(i) Describe how to use a generalized cashflow model to describe financial transactions.
(ii) Describe how to take into account the time value of money using the concepts of
compound interest and discounting.
(iii) Show how interest rates or discount rates may be expressed in terms of di↵erent time
periods.
(iv) Demonstrate a knowledge and understanding of real and money interest rates.
2. understand and formulate elementary financial problems.
(i) Calculate the present value and the accumulated value of a stream of equal or unequal
payments using specified rates of interest and the net present value at a real rate of
interest, assuming a constant rate of inflation.
(ii) Define and use the more important compound interest functions including annuities
certain.
(iii) Define an equation of value.
1
3. apply compound interest theory to tackle some practical financial problems.
(i) Describe how a loan may be repaid by regular instalments of interest and capital.
(ii) Show how discounted cashflow techniques can be used in investment project appraisal.
(iii) Calculate prices and yield rates of various fixed-income securities.
(iv) Describe investment and risk characteristics of various financial instruments.
4. show an understanding of the term structure of interest rates.
5. show an understanding of simple stochastic models for investment returns.
6. deals with Exam FM of the Society of Actuaries and Exam CT1 of the Institute and
Faculty of Actuaries.
Teaching and Assessment

Teaching is composed of three hours of lecture and one tutorial class per week. Full attendance
in lectures and tutorials is expected. Although notes will be uploaded to Moodle for reference,
additional materials may be covered in lectures and the students are fully responsible for these
in the class test and the final exam.
Assessment includes coursework (25%) [6% from 4 assignments + 19% from class test] and a
3-hour written examination paper (75%). The class test takes place on April 12, 2018 in
class, and calculator will be required. Any assignment submission passing the due date will be
penalized. Partially or wholly copied assignments will be penalized and/or reported as plagia-
rism. Please refer to the webpage http://www.hku.hk/plagiarism/ for more information
regarding what constitutes plagiarism.
Important Note on Absence from Mid-term/Class test

If for any reason you are or have been unable to attend a mid-term/class test and if you wish to
have a supplementary mid-term/class test, you must, within 7 days of the absence, write to
the General Office of the Department of Statistics and Actuarial Science giving reasons for your
absence. A special/supplementary test is normally granted to those absent from the original
test due to illness and with original medical certificate provided. Students absent due to other
reasons are not granted a special/supplementary test unless with very special circumstances and
with valid documental proofs provided.
References
• Kellison, S. G.: The Theory of Interest (Irwin: Illinois, 2008, 3rd edition).
• Broverman, S. A.: Mathematics of Investment and Credit (ACTEX Publications - Mad

River Books: Connecticut, 2004, 3rd edition).

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THE UNIVERSITY OF HONG KONG

DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE

Instructor: Prof. K.C. Yuen

Course Objectives and Learning Outcomes

1. understand basic concepts of financial mathematics.

2. understand and formulate elementary financial problems.

4. show an understanding of the term structure of interest rates.

5. show an understanding of simple stochastic models for investment returns.

Teaching and Assessment

Important Note on Absence from Mid-term/Class test

• Broverman, S. A.: Mathematics of Investment and Credit (ACTEX Publications - Mad

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