Customer Reviews

Foundations and Applications of the Time Value of Money (Frank J. Fabozzi Series)

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This book is an elementary discussion of interest rates and how to compute amounts that are compounded using these rates. Reading the book will let you understand basic accounting and to do simple financial planning. It will not however give you enough to do any non-trivial modelling. Like, for example, if you want to construct a financial derivative. Which is not a drawback of the text; it's just a start.

But it does have one flaw, even given its intended level. Various examples are given, especially in the last section, where you make estimates of total value over a number of times. For instance, a comparison is done of the value of an MBA over a subsequent lifetime, with respect to not taking the time off from the workforce, and not paying those huge tuition fees. Typically, the narrative assumes some interest rate gain, given to 2 significant digits. But the sums are given to 5 significant digits.

This is totally wrong. Simple freshman science lab students can spot the flaw in it. The analysis gives totals are over-accurate. They look impressive, to 5 digits, but the last 3 are meaningless.

The problem is that the text does not even give a quick discussion of how not to claim too much accuracy. Sadly, the book is typical of much financial projections, where you can routinely see estimates several years out, to 4 or 5 digits "accuracy". What the reader is not warned about is that the book's examples reflect the accuracy of a calculator, and not the actual accuracy [or uncertainty] of peering into the future.