Martin Vajsar wrote:I've always thought that "compound interest" means "interest from interest" (and so does Wikipedia). Over time, it can get really big (it's geometric, not linear, series). That's different than borrowing money at rate X and lending it at rate X+Y.
If you measure it against one businesst transaction (the mortgage), then you might be somewhat right. But it is much more usual - and, in my opinion, much more correct - to measure the profit against the money you've invested (ROI). And in this measure, the profit is proportional to the remaining debt.
I too think this is a great discussion. It has, at the very least, made me to try to look at the entire mortgage industry from a wider point of view.
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Piet Souris wrote:Well, as I explained, risk is only one part that determines the actual interest. That particular part is called 'credit spread'. But if lending is your business, you would also want to earn a living. And you have your expenses.
As always: it is paying off to try to see things from the perspective of the other party. If you know the reasoning,
ask yourself: if I were that banker, would I behave differently?
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Winston Gutkowski wrote:
Martin Vajsar wrote:I've always thought that "compound interest" means "interest from interest" (and so does Wikipedia). Over time, it can get really big (it's geometric, not linear, series). That's different than borrowing money at rate X and lending it at rate X+Y.
Ah, but even I know that paying back a loan at that rate is NOT arithmetic, even if the original interest rate sum is. I also wonder if it isn't part of advertising mythology ("2% above prime").![]()
Ooof (I assume you're talking about the lender's ROI). Even more reason to keep it as high as possible then, no?
Unless every remortgage is part of a larger process that takes into account the borrower's ongoing relationship with the lender (including money they've already paid), rather than simply a new contract, then you may be right; but I don't
think it's a standard requirement (do tell me if I'm wrong).
Presumably, the idea is that there's some mutual benefit to both parties in the process; otherwise it seems unlikely that they would ever have happened. And if that's the case, is it reasonable to use words like "indentured"? This would suggest that the process is simply a one-way transaction that benefits the borrower at the expense of the lender, when my argument is that it's actually probably the reverse.
My question to you, as the maths expert here (and it's a tough one): Are the formulae that you've learned as an actuary the only interpretation that can be put on a loan?
Winston Gutkowski wrote: (...)
The problem is that it gets into more philosophical questions like: "What is a loan?". Presumably, the idea is that there's some mutual benefit to both parties in the process; otherwise it seems unlikely that they would ever have happened.
There are three kinds of actuaries: those who can count, and those who can't.
Piet Souris wrote:Well, as I explained, risk is only one part that determines the actual interest. That particular part is called 'credit spread'.
But if lending is your business, you would also want to earn a living. And you have your expenses...
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Martin Vajsar wrote:If you think people are tricked into getting mortgage, now that would be something different.
Should state prevent people who didn't pass a test on financial literacy from taking mortgages?
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Martin Vajsar wrote:I've misunderstood the question apparently. It's getting late
I'd say there is unlimited number of interpretations of anything.
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Greg Charles wrote:Put me firmly in the camp that loan amortization is math, not usury. The principal declines slowly at first because you have a lot of money borrowed. Annoying? Yes, I hated how slowly my loan went down in the first decade.
Martha Simmons wrote:Are you guys working on breaking the World Record for "The Mos Boring Thread Ever"?
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Winston Gutkowski wrote:
Martin Vajsar wrote:I'd say there is unlimited number of interpretations of anything.
OK, so do you agree with my contention that the mathematical interpretation we use for loans is the most favourable one to the the lender? And if not, can you tell me why it isn't?
There are three kinds of actuaries: those who can count, and those who can't.
Piet Souris wrote:in which the bank grants you an annual interest of i, compound interest.
Winston Gutkowski wrote:I suspect a proper businessman (and probably a lot of borrowers too) can smell a bad loan or debt at twenty paces the way you or I can smell bad code; and they don't need Harvard grads to tell them why.
Winston Gutkowski wrote:I suspect a proper businessman (and probably a lot of borrowers too) can smell a bad loan or debt at twenty paces the way you or I can smell bad code; and they don't need Harvard grads to tell them why.
Winston Gutkowski wrote:
Greg Charles wrote:Put me firmly in the camp that loan amortization is math, not usury. The principal declines slowly at first because you have a lot of money borrowed. Annoying? Yes, I hated how slowly my loan went down in the first decade.
Hi Greg, and thanks for your post. Tell me: Did you take your loan to term?
Also: Do you simply accept the maths because, like me and probably most of us, it's simply "what you've been taught"? Or is there truly no other interpretation to it?
I'm still struggling with Piet's formulae, and I'm quite sure that a lot of thought went into them; I just wonder how much of that thought was put in by borrowers rather than lenders.![]()
Winston
Greg Charles wrote:Yea! Money for nothing!
Piet Souris wrote:Suppose you have 1 euro to invest...
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Jeanne Boyarsky wrote:
Winston Gutkowski wrote:
Jeanne Boyarsky wrote:For a company, yes profit is all.
Hmm. Unabashed capitalism. So presumably, things like toxic dumping and sweatshop labour are simply "friendly fire". They can, after all, simply be put down to pursuit of profit, and are still actually legal in many countries.
But coming back to less emotive subjects: What about exportation of labour? It's the backbone that is likely to turn China and India into the next #1 and 2 powers in the world over the next 50 years. Are you happy with that? Is that what you see as the "triumph of capitalism"?
Personally, I have no vested interest in who is "top dog", and I have no notion that they will do any better or worse than the US or England before them; but as a Western liberal, I worry about a future that is governed by countries where people can simply disappear, or where 90% of the wealth is owned by 5% of the population. And we (or the "profit is all" motive) will have been responsible for it.
Winston
Taking this part of the discussion to the Rattlesnake Pit. (This is a forum that will be made available on January 3rd - Jumpin JForum Day.) Moderators have access to it now as a preview so Winston and I can continue this part of the debate until then. The Rattlesnake Pit is for political or controversial topics. Which is clearly where Winston and I have gotten.
There are worse crimes than burning books. One of them is not reading them. Ray Bradbury
Robert D. Smith wrote:But Jeanne, these are the bits I want to follow. By 3 January this topic will (most likely) be dead.
"Leadership is nature's way of removing morons from the productive flow" - Dogbert
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Matthew Brown wrote:So picking a payment schedule that means your repayments decrease over time isn't very sensible, because it's at the start of the term that you expect to have most difficulty meeting the payments.
Winston Gutkowski wrote:Which is presumably just one area where actuaries come in: in calculating the payment that someone is likely to be able to make. I'm also not talking about a linear reduction in principal, but what about something in between?
Winston Gutkowski wrote:I'm also not talking about a linear reduction in principal, but what about something in between?
Pat Farrell wrote:
Winston Gutkowski wrote:Which is presumably just one area where actuaries come in: in calculating the payment that someone is likely to be able to make. I'm also not talking about a linear reduction in principal, but what about something in between?
I'm a bit confused by your use of the term actuaries here. In the US, an actuary is a statistician working for an insurance company. They calculate when you are likely to die, get in an accident, get sick, etc. They have no roll in mortgage calculations.
Pat Farrell wrote:Actually, the actuaries that I've met are very sharp and do serious wizardry with statistics. They write the mortality tables
There are three kinds of actuaries: those who can count, and those who can't.
Piet Souris wrote:But maybe it is more clear for this reason: say you have a mortgage at 10%. for a fixed 10 year period. Now,
after say 4 years, interest has dropped to 4%. Now, if you were allowed to simply pay off the residual debt any time you like, then you could simply mortgage that residual debt against 4% and redempt the old mortgage. Effectively, reducing the banks profitable loans. .... Therefore, redeemting a mortgage outside some corridor is heavily fined
There are three kinds of actuaries: those who can count, and those who can't.
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