“e” – where Finance meets Science
Many of you would know I am a trained accountant. Most would not know that my original training was in science and engineering. It’s that aspect of my life the I would like to write about now.
All of you would however be familiar with the concept of interest rates. A nightly topic on the news, interest rates determine how much spare cash we have after the mortgage payment. And the total mortgage paid is a simple calculation. To save time, I’m going to skip the math… but the formula is:
FV = PV(1+r)^t
FV = Future value
PV = Present Value
r = Interest Rate
t = time
its the formula for calculating the total amount you pay – and, (just like me), its not very sexy!
The Cool Thing though, is if you have a greedy banker!!
…whose interest rate is high…. really high…. In fact his demands are unreasonable… 100% !! But kindly he also increases the time to pay proportionally, and reduces the interest rate charged proportionally. For simplicity lets assume PV = $1.00 in this case.
FV = (1+1/n)^n
The table below exhibits the results:-
1 year = 2 times
2 years….. 2.25 times
4 years….. 2.44 times
Perhaps, worthy of further investigation.
50 years …. 2.69159 times
10,000 years…. 2.71815 times
10,000,000 years…. 2.71828 times
As you can see our, “Greedy Banker”, gets a “diminishing return” on his investment over time… even over 10 million years – time hardly effects the total amount paid.
As the years increase the total settles to around 2.71828 times – termed “e” – it is the base of Natural Logarithms. A key number that is used to calculate everything from life expectancy, to the curve on a suspension bridge, to a satellite’s orbit….
It still amazes me that such simple financial concept produced one of the Universe’s most useful numbers!
“e” is truly where finance and science meet!