Thursday, July 14, 2011

the theory of interest


The theory of interest is one of my favorite subjects. I own a whole book on it. Every chapter ends with a series of exercises, all of which can be answered with the sentence: "No, she's not".

Just kidding! Not that interest!1

I'm talking about interest rate theory as applied to money. Oh yeah. I'm so good with interest rate theory that I once derived four flavors of annuity formulas from scratch one day when I was bored in church.2

When trying to derive these formulas, it's always good to start off slow, so let's look at the future value formula:

FV = X * (1 + i)n

See how easy that was? That's how much money you'll make by sequestering your money away in a theoretical account that pays theoretical interest.

Now, and please don't take this to mean that inspiration received during church meetings isn't true, but this isn't actually the full formula. In school, they always leave out that pesky last constant:

FV = X * (1 + i)n - C

Where C represents 1/2 * X * (1 + i)n, or half of everything you make.

In Actuarial circles, this constant is commonly referred to as the ChrisPerryIsInvestingAgainAndWillLoseHalfofHisMeagerEarningsLikeAlways constant, and, if you actually stayed awake in High School math instead of drawing pirate ships on test questions,3 you'll recognize it as a variable, not a constant.

In upper-division math classes, the kind that my Engineering brothers and sister attended and I did not because I was too dumb, this is common knowledge. It's also common knowledge among IRS auditors, who, last month, discovering that I neglected to apply for a tax writeoff for my loss of ten thousand dollars in the tax year 2009 (due to the equation above), decided to add insult to injury, and bill me an extra...ten thousand dollars in taxes for that year. This makes sense, because, in the even more upper-division math classes, tax is calculated by the formula of:

T = W

Where W represents the WhateverWeCanBillChrisWithoutLaughingSoHardWeSnortAPileOfPhlegmOntoOurHandsRightBeforeACoworkerTriesToShakeHandsWithUsAndNoIDoNotSpeakFromExperience constant. This is also technically a variable.

Another great topic related to the theory of interest is the Black-Scholes model for pricing options. Now, I realize this gets into calculus, and if you're a BYU Econ student, you start moaning at its mere mention, but hold on with me as I show you how you can price options:

C = Y * 1,000,000

Where the variable Y is equal to 1 if you turn down the job offer at the tech company that, four years later goes public and would have made you a paper millionnaire,4 and is equal to...much less for whatever job you may have accepted.

This is the sort of theory that makes it difficult to acquire interest, from both money and women.

Now if you'll excuse me, I got online this morning to cry like a baby and file tax amendments, and I'm all out of Kleenex.5

1. Even if that's true.
2. Notice how I am coyly not telling you in which church meeting this was, lest my mother read this. But I'll give you a hint: it rhymes with shmeneral dogference.
3. True story.
4. Not that I am still in mourning over that hypothetical theoretical construct. Not that I've just gone through and listed everything I would have done if I were a millionnaire today. And not that I'm crying scalding tears of pain...right...now...
5. Literally. I really should buy some so the next time I sneeze right before shaking hands it's not super awkward as I pretend to be carrying something really important in my right hand. Uhh, sorry, got this toothbrush. Can't shake hands.

2 comments:

Michemily said...

Girls, taxes, and creaky IKEA beds . . . isn't conflict great blog material?

Aroura said...

lmbo (not hard enough to produce phlegm, mind you, but still!) You drew pirate ships, I drew prom dresses for the only other girls in my class (2 to be precise). That, and wrote not-very-nice notes about Mr. Barton when he was in a bad mood.
I vaguely remember numbers and letters in various order meaning something, but now it just looks like something a UFO would send to communicate with us. Maybe they found a practical application for calculus?