This lesson explains why numerical analysis is essential to treasury and how to calculate common types of interest rates to compare short-term borrowing costs and returns on short-term investments. Business decisions have to factor in the cost of money, either in the form of interest, or a more general cost of funds .

6.1 Importance of Numerical Analysis

Numerical analysis is essential to the function of treasury for: analysis and interpretation of data, monitoring cash flow, forecasting need for other funds, forecasting return on investments, value of money in different currencies, and understanding the time value of money .

6.2 Interest Rate Market Conventions

The ACT syllabus requires the ability to calculate common types of interest rates and use them to compare short-term borrowing costs and returns on short-term investments . Key concepts include:

• Basis points and day counts: Understanding how interest is calculated across different conventions .

• Simple interest rates: Interest calculated on the original principal only .

• Periodic interest rates: The interest rate for a specific period .

• Compound interest rates: Interest calculated on the principal and the accumulated interest of previous periods .

• Effective annual rates: The actual annual rate earned or paid when compounding is taken into account .

• Nominal annual rates: The stated annual rate without accounting for compounding .

6.3 Yield and Discount Calculations

The ACT syllabus requires the ability to calculate short-term yields, discount rates, redemption values and market prices to enable appropriate comparisons between different short-term instruments . Key skills include:

• Principles of short-term discount instruments and converting between discount rates and yields .

• The relationship between nominal interest rates and the equivalent annual effective rate .

• Comparing different short-term instruments on a like-for-like basis .