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\begin{document}
\author{}
\title{Financial Mathematics}
\maketitle
\subsection{Accumulation function}
\begin{align*}
i_t &= \frac{a(t)-a(t-1)}{a(t-1)}\\
i_t &= \frac{A(t)-A(t-1)}{A(t-1)}\\
A(t) &= k \cdot a(t)
\end{align*}
Under simple interest
\begin{align*}
a(t) &= 1 + it \\
i_t &= \frac{i}{1+i(t-1)}
\end{align*}
Under compound interest
\begin{align*}
a(t) &= (1 + i)^t \\
PV &= \frac{1}{a(t)}
\end{align*}
\subsection{Force of Interest}
\begin{align*}
\delta_t &= \frac{1}{a(t)} \frac{d}{dt} a(t) \\
&= \frac{1}{A(t)} \frac{d}{dt} A(t) \\
a(t) &= e^{\int_0^t \delta_s ds} \\
\end{align*}
Constant force of interest: $e^{\delta} = 1+ i$
\subsection{Power Series}
\begin{align*}
e^x &= 1 + x +\frac{x^2}{2} +\frac{x^3}{3}+\ldots \\
ln(1+x) &= x - \frac{x^2}{2} + \frac{x^3}{3} - \ldots
\end{align*}
\newpage
\subsection{Annuities}
\begin{align*}
{a}_{\lcroof{n}} &= \frac{1-v^n}{i}\\
\ddot{a}_{\lcroof{n}} &= \frac{1-v^n}{d}\\
\ddot{a}_{\lcroof{n}} &= (1+i) {a}_{\lcroof{n}} = {a}_{\lcroof{n-1}}+1
\end{align*}
\subsection{Accumulated values}
\begin{align*}
{s}_{\lcroof{n}} &= \frac{(1+i)^n-1}{i}\\
\ddot{s}_{\lcroof{n}} &= \frac{(1+i)^n-1}{d}\\
\ddot{s}_{\lcroof{n}} &= (1+i) {s}_{\lcroof{n}} = {s}_{\lcroof{n+1}}-1
\end{align*}
\subsection{Deferred annuities/perpetuities}
\begin{align*}
_{m|}{a}_{\lcroof{n}} &= v^m{a}_{\lcroof{n}} = {a}_{\lcroof{m+n}}-
{a}_{\lcroof{m}}\\
{a}_{\lcroof{\infty}} &= \frac{1}{i}\\
\ddot{a}_{\lcroof{n}} &= \frac{1}{d}\\
\frac{1}{d}-\frac{1}{i} &= 1
\end{align*}
\subsection{Annuity tricks}
\begin{align*}
\frac{{a}_{\lcroof{2n}}}{{a}_{\lcroof{n}}} &= 1 + v^n\\
\\
{a}_{\lcroof{2n}} &= {a}_{\lcroof{n}} + v^n{a}_{\lcroof{n}}\\
&= (1+v^n){a}_{\lcroof{n}}\\
\\
{a}_{\lcroof{3n}} &= {a}_{\lcroof{n}} + v^n{a}_{\lcroof{n}} + v^{2n}
{a}_{\lcroof{n}}\\
&= (1+v^n+v^{2n}){a}_{\lcroof{n}}
\end{align*}
\newpage
%----------------- CHAPTER 5---------------------------
\section{Yield Rates}
\subsection{Reinvestment rates}
Option 1: Deposit of 1, into fund earning $i$, interest is reinvested at $i'$.
\[ AV = 1 + i \cdot {s}_{\lcroof{n}~i'} \]
Option 2: Yearly deposits of 1, into fund earning $i$, interest reinvested at $i'$.
\[ AV = n + i \cdot \left( I{s}\right)_{\lcroof{n}~i'} \]
\newpage
%----------------- CHAPTER 6---------------------------
\section{Amortization Schedules and Sinking Funds}
\subsection{Amortizing a loan}
\begin{table}[ht]
\centering
\begin{tabular}{c c c c c}% centered columns (5 columns)
\hline
Duration & Payment & Interest Paid & Principal Repaid & Oustanding Principal\\
$t$ & $R$ & $I_t = i B_{t-1}$ & $P_t = R - I_t$ & $B_t= B_{t-1} - T_t$\\[1ex]
% inserts table heading
\hline% inserts single horizontal line
$0$ & & & & ${a}_{\lcroof{n}}$\\[1ex]
$1$ & $1$ & $i{a}_{\lcroof{n}}=1-v^n$ & $v^n$ & ${a}_{\lcroof{n}}-v^n =
{a}_{\lcroof{n-1}}$ \\[1ex]
$2$ & $1$ & $i{a}_{\lcroof{n-1}}=1-v^{n-1}$ & $v^{n-1}$ & ${a}_{\lcroof{n-1}}-
v^{n-1} = {a}_{\lcroof{n-2}}$ \\[1ex]
\vdots & \vdots & \vdots & \vdots & \vdots\\[1ex]
$t$ & $1$ & $i{a}_{\lcroof{n-t+1}}=1-v^{n-t+1}$ & $v^{n-t+1}$ & ${a}_{\lcroof{n-
t+1}}-v^{n-t+1} = {a}_{\lcroof{n-t}}$ \\[1ex]
\vdots & \vdots & \vdots & \vdots & \vdots\\[1ex]
$n$ & $1$ & $i{a}_{\lcroof{1}}=1-v$ & $v$ & ${a}_{\lcroof{1}}-v = 0$ \\[1ex]
\hline%inserts single line
Total & $n$ & $n-{a}_{\lcroof{n}}$ & ${a}_{\lcroof{n}}$ & \\[1ex]
\hline%inserts single line
\end{tabular}
\end{table}
\subsection{Sinking funds}
\begin{itemize}
\item[-] Interest rate on loan $= i$ \\
Interest rate on sinking fund $= j$
\item[-] Periodic interest payment on loan $= I_t = i \cdot B_0$
\item[-] Periodic sinking fund deposit $SFD= \frac{B_0}{ {s}_{\lcroof{n}~j} }$
\item[-] Total periodic payment $R = i \cdot B_0 + \frac{B_0}
{ {s}_{\lcroof{n}~j} }$
\item[-] Total loan amount $B_0 = (R- i \cdot B_0) \ {s}_{\lcroof{n}~j} $
\item[-] Principal repaid $P_t = (1+i) P_{t-1} + (R_t - R_{t-1} )$
\end{itemize}
\newpage
%----------------- CHAPTER 7---------------------------
\section{Bonds}
\subsection{Price of a Bond}
If $C$ is the redemption value, $F$ the face amount and $r$ the coupon rate, then:
\[ P = Fr~ {a}_{\lcroof{n}~i} + Cv^n \]
If $Fr=Cg$ (usefull when $n$ is unknown),
\[ P = C+ (Fr-Ci) {a}_{\lcroof{n}~i} \]
and
\[ P = \frac{g}{i}(C-Cv^n) + Cv^n \]
\newpage
%----------------- CHAPTER 8---------------------------
\section{Financial Instruments}
Price of a share of stock
\[ PV\left(D,D(1+k),D(1+k)^2,\ldots \right)= \frac{D}{i-k} \]
Price of a U.S. T-Bill
\[P= 100\left(1-\frac{n}{360}d\right) \]
\subsection{Duration}
\begin{itemize}
\item[-] Macaulay duration
\[ D = \frac{\sum_t t \cdot v^t \cdot CF_t}{ \sum_t v^t \cdot CF_t} \]
\item[-] Modified duration
\begin{align*}
ModD &= -\frac{P'(i)}{P(i)} = \frac{D}{1+i} \\
P\left(i + \Delta i \right) &\approx P(i) - ModD \cdot P \cdot \Delta i
\end{align*}
\item[-] Portfolio duration
\[ D= \frac{P_1 D_1 + P_2 D_2 + P_3 D_3}{P_1+P_2+P_3} \]
\end{itemize}
\subsection{Convexity}
\begin{align*}
C &= \frac{\sum_t t \cdot (t+1) \cdot v^{t+2} \cdot CF_t}{ \sum_t v^t \cdot
CF_t} \\
P\left(i + \Delta i \right) & \approx P(i) - ModD \cdot P \cdot \Delta i +
\frac{1}{2}\cdot C \cdot P \cdot \Delta i^2
\end{align*}
\subsection{Immunization}
Redington immunization
\begin{itemize}
\item[-] $PV(assets) = PV(liabilities)$
\item[-] $P'_A = P'_L$
\item[-] $ P''_A=P''_L$
\end{itemize}
Full immunization
\begin{itemize}
\item[-] $PV(assets) = PV(liabilities)$
\item[-] $P'_A = P'_L$
\item[-] One asset CF before and one after liability CF
\end{itemize}
Interest-sensitive cash flows
\begin{align*}
Effective~ duration &= \frac{P(i-h)-P(i+h)}{2hP(i)}\\
Effective~ convexity &= \frac{P(i+h)+P(i-h)-2P(i)}{h^2P(i)}
\end{align*}
\end{document}