Does the Mathematics of Finance Feel Like a Foreign Language?
Math is a kind of language. As if that’s not enough, within the field of finance there’s all kinds of terminology. Some of you might recognize what follows.
Here’s an excerpt from my book Would Your Boomerang Return? What Birds, Hurdlers, and Boomerangs Can Teach Us About the Time Value of Money (2023):
So, terminology. Let’s start with a phrase that many aspiring and current finance professionals can recite. “A dollar today is worth more than a dollar tomorrow.” But we’re not concerned with the Time Worth of Money. There’s no reference in the Mathematics of Finance to Present Worth and Future Worth; instead, Present Value and Future Value.
Investors are indifferent between values of money in different points in time because there are markets for capital. Investors expect to earn an investment yield, which compensates them for delaying consumption, opportunity cost, and for taking on exposure to risk including the risk of inflation. Even if investors don’t deploy or invest cash, they must recognize that they could. The presence of investment alternatives keeps investors in the right state of mind which considers that money has time value. If there are markets for capital that consist of equity, debt, and hybrid investments then what’s all this talk about compound interest? Why not compound yield or compound investment yield? There are more places to invest money than just checking and savings accounts, money market instruments, and bonds that return interest.
Finance professionals are well aware of the relationship between price and yield, but nobody is talking about the price that is expected to generate a certain interest. There’s a difference between return on investment and return of investment, yet when we get to the point of estimating return on investment, are you scratching your head as to why we’re not using the investment metric (ROI) that consists of the same words: rather, the Internal Rate of Return? That’s confusing!
Photo by Brent Pritchard.
What words would you use to describe the Mathematics of Finance? (Must include less than or more than four letters!)
Brent Pritchard is an author and college finance lecturer with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.