Principals of Financial Mathematics

Cashflow Model

A mathematical projection of the payments arising from a financial transaction, such as a loan or capital project.

Positive Cashflow

Money received in a cashflow model, represented as positive values.

Negative Cashflow

Money paid out in a cashflow model, represented as negative values.

Net Cashflow

The difference between income and outgo at a single point in time.

Zero-Coupon Bond

A security that provides a specified lump sum at a specified future date, with no interest payments during the term.

Fixed-Interest Security

A form of investment that pays a series of fixed interest payments over time, plus a lump sum repayment of capital.

Index-Linked Security

A security whose cashflows are adjusted according to an inflation index, maintaining purchasing power.

Equity Shares

Securities that represent ownership in a company, where dividends vary based on company profits.

Annuity Certain

A financial product providing a series of regular payments in exchange for a lump sum premium.

Interest-Only Loan

A loan where the borrower pays only the interest during the term, with the principal due at the end.

Repayment Loan

A loan requiring regular payments that include both interest and repayment of the principal.

Present Value (PV)

The amount that needs to be invested now to provide a future sum at a specified interest rate.

Simple Interest

Interest calculated only on the principal amount, not on accumulated interest.

Compound Interest

Interest calculated on the initial principal and also on the interest that has been added to the principal.

Discount Rate

The interest rate used to determine the present value of future cashflows.

Effective Interest Rate

The actual interest earned or paid on an investment or loan expressed on an annual basis.

Accrual Factor

The factor by which an investment grows over a certain period based on either interest or discounting methods.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.