Category: Math

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Y is for Yield Curve

The Yield Curve is a simple idea with surprising predictive power. The Yield Curve is a magic eight ball, which tells the interpreter what they want to hear. The Curve is a bunch of numbers. The Curve tells you everything that happened, but only in retrospect.

All of the above.

Basic yield curve shapes, colotrust.com.

People really wax poetic about the yield curve. There’s one guy at NPR that goes ga-ga over the yield curve and has done podcasts on it with clock-like regularity:

GARCIA: …I got to say, it is one of my favorite indicators.
SMITH: Cardiff, you love the yield curve.
GARCIA: Very much.
SMITH: Every time we talk about the yield curve, you kind of light up. And I have no idea why this is the case.

NPR podcast, Apr 6, 2021.
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R is for ROI (Return on Investment)

Graphic from JFitzgerald.com.

ROI is overrated.

Return on Investment (ROI) is one of the most widely used financial ratios, like Earnings Per Share (EPS), Current Ratio (CR), or Debt to Equity (DE). These things grow like weeds, once fledgling MBAs get hold of an HP 12-C calculator. Soon every conversation gets sprinkled with acronyms. Then, executives try to apply financial ratios to everything, and anyone who objects that you can’t put a value on everything is told to take a hike.

Net Profit means after subtracting the Cost of the Investment. Graphic from investinganswers.com.

Not Entirely Useless

ROI can be a useful measure, especially in making choices. Suppose you have a portfolio–that’s investor slang for “bunch of different”–investments that you made of differing amounts. You want to know which one has grown the most consistently over the last five years. An ROI comparison makes the numbers comparable.

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L is for Liabilities

Why do people always make liabilities sound so complicated?

An online lesson making liabilities simpler. Photo from Youtube.

For example, *ahem* the semiannual interest payment for a five-year, $1,000 par-value bond with an annual 8% coupon is $40: ($1,000 x 0.08) / 2 = $80 / 2 = $40… or… if the bond was issued at a premium of $200, the semiannual amortization using the straight-line method is simply $20: ($200 / 5) / 2 = $40 / 2 = $20. Therefore, debit interest expense by $20 ($40 – $20), credit cash by $40 and debit premium on bonds payable by $20.

See? Nothin’ to it.

Easy for you to say.

Liabilities are complicated because people are forward-thinking. Humans do not live on cash flow alone. There must be accrual. And accruals are the stuff of science fiction because they suggest the future.

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