Preface

This book is a revision of the original An Introduction to the Mathematics of

Finance by J.J. McCutcheon and W.F. Scott. The subject of nancial mathematics
has expanded immensely since the publication of that rst edition in the 1980s,
and the aim of this second edition is to update the content for the modern
audience. Despite the recent advances in stochastic models within nancial
mathematics, the book remains concerned almost entirely with deterministic
approaches. The reason for this is twofold. Firstly, many readers will nd a solid
understanding of deterministic methods within the classical theory of
compound interest entirely sufcient for their needs. This group of readers is
likely to include economists, accountants, and general business practitioners.
Secondly, readers intending to study towards an advanced understanding
of nancial mathematics need to start with the fundamental concept of
compound interest. Such readers should treat this as an introductory text. Care
has been taken to point towards areas where stochastic concepts will likely be
developed in later studies; indeed, Chapters 10, 11, and 12 are intended as an
introduction to the fundamentals and application of modern nancial mathematics in the broader sense.
The book is primarily aimed at readers who are preparing for university or
professional examinations. The material presented here now covers the entire
CT1 syllabus of the Institute and Faculty of Actuaries (as at 2013) and also some
material relevant to the CT8 and ST5 syllabuses. This combination of material
corresponds to the FM-Financial Mathematics syllabus of the Society of Actuaries.
Furthermore, students of the CFA Institute will nd this book useful in support
of various aspects of their studies. With exam preparation in mind, this second
edition includes many past examination questions from the Institute and Faculty
of Actuaries and the CFA Institute, with worked solutions.
The book is necessarily mathematical, but I hope not too mathematical. It is
expected that readers have a solid understanding of calculus, linear algebra, and
probability, but to a level no higher than would be expected from a strong rst
year undergraduate in a numerate subject. That is not to say the material is easy,

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Preface

rather the difculty arises from the sheer breath of application and the perhaps
unfamiliar real-world contexts.
Where appropriate, additional material in this edition has been based on core
reading material from the Institute and Faculty of Actuaries, and I am grateful to
Dr. Trevor Watkins for permission to use this. I am also grateful to Laura Clarke
and Sally Calder of the Institute and Faculty of Actuaries for their help, not least in
sourcing relevant past examination questions from their archives. I am also
grateful to Kathleen Paoni and Dr. J. Scott Bentley of Elsevier for supporting me
in my rst venture into the world of textbooks. I also wish to acknowledge the
entertaining company of my good friend and colleague Dr. Andrew McMullan
of the University of Leicester on the numerous coffee breaks between writing.
This edition has benetted hugely from comments made by undergraduate and
postgraduate students enrolled on my modules An Introduction to Actuarial
Mathematics and Theory of Interest at the University of Leicester in 2012. Particular
mention should be given to the eagle eyes of Fern Dyer, George HodgsonAbbott, Hitesh Gohel, Prashray Khaire, Yueh-Chin Lin, Jian Li, and Jianjian
Shao, who pointed out numerous typos in previous drafts. Any errors that
remain are of course entirely my fault.
This list of acknowledgements would not be complete without special mention
of my wife, Yvette, who puts up with my constant working and occasional
grumpiness. Yvette is a constant supporter of everything I do, and I could not
have done this, or indeed much else, without her.
Dr. Stephen J. Garrett
Department of Mathematics, University of Leicester

January 2013