Exam FM Details

Interest rates are everywhere. From mortgages to car loans, interest rates determine what we pay each month and how much we still owe. In Section 1, we explore interest rate definitions, functions, and formulas. This will be the foundation for the entire course. Always return to this section when you get stuck on more advanced topics that use terms from this section.

Once you learn the basics from Section 1, you are ready for the annuities in Section 2. There are many annuities and formulas in this section. Don’t get lost in the math. Once you understand the concept of an annuity, you can easily derive any formula. Thus, do not focus on memorization in this section, but on fully understanding the concepts. Your goal is to know how to calculate any annuity for any given time.

Now that we are familiar with interest rates and annuities, we can solve business problems. First is loans. Think of a home mortgage. How are monthly payments calculated? How much interest is paid each year? How can a borrower change payments so that a 10-year mortgage is paid in only 5 years?

We can also use interest rates and annuities to calculate prices for bonds. The challenge for this section is to understand business terms. What are the components of a bond? Cash flows are now coupons, redemption values, and dividends. Once you understand these terms, you can calculate the bond prices by using the same techniques from previous sections.

In this final section, we dig deeper into interest rates and explore yield curves. We will use duration and convexity to estimate the new price given the new interest rates. Then, we will learn the basics to ensure our assets will exceed our liabilities when interest rates change.