Table of Contents

Cover 2
Title page 3
Contents 4
Acknowledgements 10
About the author 11
Conventions 12
Overview 13
How to use this book 14
Warranty and disclaimer 15
1 Introduction 16
Overview 16
Common Excel errors 17
Systematic design method 19
Auditing 26
Summary 29
2 Basic financial arithmetic 30
Simple interest 31
Compound interest 35
Multiple payments 43
Differing interest rates 47
Nominal and effective rates 49
Continuous discounting 52
Conversions and comparisons 53
Exercise 54
Summary 55
3 Cash flows 56
Net present value 56
Varying interest rates 60
Internal rate of return 62
XNPV and XIRR 67
XNPV periodic example 68
Modified internal rate of return 69
Exercise 71
Summary 72
4 Bonds calculations 73
Description 74
Cash flows 76
Zero coupons 79
Yield 79
Yield to call 80
Price and yield relationship 82
Yield curve pricing 83
Other yield measures 85
Yield measures 88
Exercise 91
Summary 91
5 Bond risks 92
Risks 92
Duration 96
Convexity 101
Comparison 106
Exercise 108
Summary 109
6 Floating rate securities 110
Floating rates 110
Characteristics of interest rate securities 111
Yield evaluation 113
Coupon stripping 119
Exercise 120
Summary 122
7 Amortisation and depreciation 123
Amortisation 123
Full amortisation 126
Delayed payments 127
Sum of digits 131
Straight line and declining balance depreciation 133
UK declining balance method 134
Double declining balance depreciation 136
French depreciation 137
Exercise 140
Summary 140
8 Swaps 142
 Definitions 142
How swaps save money 145
Advantages of swaps 147
Terminating interest rate swaps 147
Implicit credit risk 148
Worked single currency swap 148
Valuation 152
Cross currency swap 153
Worked example 154
Swaptions 156
Exercise 157
Summary 158
9 Forward interest rates 159
Definitions 159
Example forward rates 160
Hedging principles 163
Forward rate agreement 166
Yield curves 169
Exercise 174
Summary 175
10 Futures 176
Futures market 176
Terminology 177
Benefits 178
Clearinghouse operation 179
Bond futures 180
Hedging mechanisms 180
Hedging example 1 183
Hedging example 2 186
Exercise 189
Summary 190
11 Foreign exchange 191
Risk 191
Spot rates 193
Longer dates 199
Equivalence 200
Comparisons and arbitrage 202
Exercise 204
 Summary 204
12 Options 205
Description 206
Terminology 207
Underlying asset 208
Call options 210
Put options 215
Example 219
Covered call 221
Insurance using a stock and a long put 223
Pricing models 225
Black–Scholes model 226
Call put parity 229
Greeks 230
Binomial models 234
Comparison with Black–Scholes 238
Exercise 244
Summary 245
13 Real options 246
Real options 246
Black–Scholes model 247
Binomial model 249
Exercise 251
Summary 252
14 Valuation 253
Valuation methods 253
Assets 255
Market methods 256
Multi-period dividend discount models 258
Free cash flow valuation 260
Adjusted present value 272
Economic profit 276
Exercise 280
Summary 280
15 Leasing 281
Economics of leasing 281
Interest rates 283
Classification 285
 Amortisation 290
Accounting 291
Settlements 293
Lessor evaluation 297
Lessee evaluation 301
Exercise 304
Summary 305
16 Basic statistics 306
Methods 306
Descriptive statistics 307
Probability distributions 323
Sampling/Central Limit Theorem 333
Hypothesis testing 339
Correlation and regression 352
LINEST function 362
Exercise 364
Summary 364
Appendices 366
1 Exercise answers, functions list, software installation and licence 368
2 An introduction to Microsoft® Office 412
Index 429
Imprint page 446