Mastering Financial Mathematics in Microsoft Excel A Practical Guide for Business Calculations

Alastair Day has worked in the finance industry for 20 years in treasury and marketing functions. In 1990 he established Systematic Finance as a consultancy and financial lessor concentrating on the computer and communications industries. Alastair has a degree in Economics and German from London University, an MBA from the Open University Business School, and is an associate lecturer in corporate finance with the OUBS. He is the successful author of several books including Mastering financial Modelling, Mastering Risk Modelling and The Financial Director’s Guide to Purchasing Leasing published by the Financial Times Prentice Hall and a range of software products. In addition, he develops and presents public and in-house courses on a range of topics including financial modelling, leasing, credit and cash flow analysis, and other corporate finance topics.

Table of Contents

Acknowledgements

About the Author

Conventions

Overview

Warranty and disclaimer

1 Introduction

Overview

Common Excel errors

Systematic design method

Auditing

Summary

Exercises

2 Basic financial arithmetic

Simple interest

Compound interest

Nominal and effective rates

Continuous discounting

Conversions and comparisons

Exercise

Summary

3 Cash flows

Net present value

Internal rate of return

XNPV and XIRR

XNPV periodic example

Modified internal rate of return

Exercise

Summary

4 Bonds calculations

Description

Cash flows

Zero coupons

Yield

Yield to call

Price and yield relationship

Yield curve pricing

Other yield measures

Yield measures

Exercise

Summary

5 Bonds risks

Risks

Duration

Convexity

Comparison

Exercise

Summary

6 Floating rate securities

Floating rates

Characteristics of interest rate securities

Yield evaluation

Coupon stripping

Exercise

Summary

7 Amortization and depreciation

Amortization

Full amortization

Delayed payments

Sum of digits

Straight line and declining balance depreciation

UK declining balance method

Double declining balance depreciation

French depreciation

Exercise

Summary

8 Swaps

Definitions

How swaps save money

Advantages of swaps

Terminating interest rate swaps

Implicit credit risk

Worked single currency swap

Valuation

Cross currency swap

Worked example

Swaptions

Exercise

Summary

9 Forward interest rates

Definitions

Example forward rates

Hedging principles

Forward rate agreement

Yield curves

Exercise

Summary

10 Futures

Futures market

Terminology

Benefits

Clearinghouse operation

Bond futures

Hedging mechanisms

 Hedging example one

Hedging example two

Exercise

Summary

11 Foreign exchange

Risk

Spot rates

Longer dates

Equivalence

Comparisons and arbitrage

Exercise

Summary

12 Options

Description

Terminology

Underlying asset

Call options

Put options

Example

Covered call

Insurance using a stock and a long put

Pricing models

Black Scholes model

Call put parity

Greeks

Binomial models

Comparison to Black Scholes

Exercise

Summary

13 Real options

Real options

Black Scholes model

Binomial model

Exercise

Summary

14 Valuation

Valuation methods

Assets

Market methods

Multi-period dividend discount models

Free cash flow valuation

Adjusted present value

Economic profit

Exercise

Summary

15 Leasing

Economics of leasing

Interest rates

Classification

Amortization

Accounting

Settlements

Lessor evaluation

Lessee evaluation

Exercise

Summary

16 Basic statistics

Methods

Descriptive statistics

Probability distributions

Sampling/Central Limit Theorem

Hypothesis testing

Correlation and regression

LINEST function

Exercise

Summary

Appendix

Glossary

Index

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