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Lecture 9 Securities Quiz Ana Nora Evans 403 Kerchof AnaNEvans@virginia.edu http://people.virginia.edu/~ans5k/ Math 1140 Financial Mathematics

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Math 1140 - Financial Mathematics A)I had a great weekend. B)I hate Monday mornings. C)I am asleep now. D)Just give me the quiz and let me sleep. E)I am eager to learn more math. 2

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Math 1140 - Financial Mathematics Promissory Notes A promissory note is legal document showing a promise to pay agreement. A note is non-interest-bearing if the maturity date is specified instead of the principal and the interest rate. A note bears interest if it specifies the principal, the term, and the interest rate. 3

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Math 1140 - Financial Mathematics In this type of problem you are given the maturity value, the sale date, the due date, the discount rate, and you are asked to calculate the sale price. Use the discount proceeds formula P = S(1-dt) Amount = maturity value of the note Term = the term from the sell date to the date when the note matures Discount rate = discount rate Discounting Non-interest-bearing Notes 4

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Math 1140 - Financial Mathematics Three transactions: 1)The borrower takes out a loan from a lender 2)The lender sells the note to a third party 3)The borrower pays back the loan to the third party Usually, the first transaction bears simple interest. The second transaction uses discount interest. Discounting Interest-bearing Notes 5

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Math 1140 - Financial Mathematics Step 1) Calculate the maturity value of the note Step 2) Calculate the sale price Step 1) Use the future value formula S = P(1+it) Step 2) Use the discount proceeds formula as in the case of non-interest-bearing notes. P = S(1-dt) Discounting Interest-bearing Notes 6

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Math 1140 - Financial Mathematics A $1,000 promissory note, due in 270 days bearing 5% interest is sold after 130 days to a bank charging 8% discount interest. How much does the bank pay? Example 7

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Math 1140 - Financial Mathematics Questions 8

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Math 1140 - Financial Mathematics Securities Exchange Act of 1934 The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting- trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘‘security’’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. 9

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Math 1140 - Financial Mathematics Securities A security is another form of ownership. Debt securities banknotes promissory notes treasury bills 10

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Math 1140 - Financial Mathematics Securities Equity securities (e.g. stock) Derivatives A derivative is a financial instrument whose value depends on the values of other, more basic, underlying assets. For example, a stock option is a derivative whose value depends on the price of a stock. 11

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Math 1140 - Financial Mathematics Money Market The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. 12

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Math 1140 - Financial Mathematics Secondary Market A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. Examples New York Stock Exchange NASDAQ 13

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Math 1140 - Financial Mathematics Money market = fish market 14

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Math 1140 - Financial Mathematics Secondary market = Whole Foods 15

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Math 1140 - Financial Mathematics Quiz Solve as many problems as you can. The quiz counts as 30 points class participation. A clicker question is 2 or 3 points, so the quiz is the equivalent to 10-15 clicker questions. 16

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Math 1140 - Financial Mathematics A)Monday 11:00-12:30 B)Monday 1:00-2:30 C)Tuesday 11:00-12:30 D)Tuesday 3:30-5:00 A)I received the email on Friday about the review session B)I have never received an email sent to fall2011_math1140@coll ab.itc.virginia.edu fall2011_math1140@coll ab.itc.virginia.edu 17

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Math 1140 - Financial Mathematics Next time Treasury bills and certificates of deposit Wednesday Read section 2.5 Homework 4 is due. First Exam (max 15 points): 26 September 2011 at 7pm Location to be announced Charge 18

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