In college, I studied Actuarial Science. When I graduated I decided to learn more about data science and programming as I had always been interested in computer science. Soon after I began studying data science at the Flatiron School, I wrote a blog about the potential overlap between these two studies of actuarial science and data science (Actuarial Science and Data Science with LifeLib).
Having finished my educational program a few weeks ago, I set out to begin creating an actuarial library for Python. In theory, this will eventually be available to all data scientists and actuaries and will work to bridge the gap between actuarial science and programming. I believe these applications can significantly increase an actuary’s productivity and efficiency.
Thus far, I have passed one actuarial exam, the Financial Mathematics Exam (FM Exam). Seeing as I have mastered this subject and am most familiar with this material, I decided to begin building a financial mathematics calculator to simulate many of the functions of the BAII-Plus calculator used in the FM Exam as well as some higher-level exams.
These concepts learned for the FM Exam serves as a foundation for a lot of the more advanced material in actuarial science. The BAII-Plus calculator is often used on later exams such as the Long Term Actuarial Mathematics Exam. While these Python tools will not be available during the sitting of the exams, once an actuary is in the field, utilizing computing power in order to automate and speed up calculations can be immensely valuable.
Creating a Financial Mathematics Calculator in Python
First, I started with the basics. Accumulation and Discount.
In order to accumulate a payment n years ahead at an interest rate of i, the payment must be multiplied by the accumulation factor, (1+i)ⁿ.
In order to discount a payment back n years at an interest rate of i, the payment must be multiplied by the discount factor, v=(1+i)⁻ⁿ, or divided by the accumulation factor. (v=1/(1+i)).
Next, I needed to create functions for annuities.
In actuarial science, there are formulas for annuities immediate and annuities due.
An annuity immediate has payments that start on year 1, or one interest period after the annuity started.
An annuity due has payments that start the same year or time that the annuity begins at year 0.
These annuity formulas can help us to find any unknown in an annuity problem. In the calculator file I mainly use these annuity functions to help solve for unknown payment amounts. While I could have also utilized these formulas for present value and future value calculations, I decided to take a more intuitive programming approach in iteration through each discount/accumulation and summing the discounts or accumulations together. I have not yet thought of a better way to solve for unknown payments without the use of annuity formulas.
Starting the Calculator
Next, it was time to begin the calculator function. I created a function that inputs the parameters n, i, pv, pmt, fv, and bng. Each of these corresponds to common time value of money buttons on the BAII-Plus calculator. Currently, the calculator function has worked for many problems pertaining to present values of annuities immediate and due, future values of annuities immediate and due, and unknown payment calculations. Some examples of problems I have tried so far are below:
- How much money must you deposit now at 6% interest compounded quarterly in order to be able to withdraw $3,000 at the end of each quarter year for two years? (Answer: $22,457.78)
will output 22457.775239802715.
- Switching some things up in Question 1 to ensure the payment function works… (Answer: $3,000).
-Running baii(n=8,i=1.5,pv=22457.775239802715, pmt=’solve’)
will output 3000.0000000000164
- How much would I have to deposit in an account today that pays 12% interest compounded quarterly, so that I have a balance of 20,000 in the account at the end of 10 years? (Answer: $6,131.14)
will output 6131.136815476127.
- Suppose you invested $1000 per quarter over a 15 year period. If money earns an annual rate of 6.5% compounded quarterly, how much would be available at the end of the time period? (Answer: $100,336.68)
will output 100336.67614366407.
- Determine the present value of a 15-month annuity immediate with monthly payments of 7 using a monthly effective interest rate of 0.6%. (Answer: $100.13)
will output 100.12683669679065.
- Find the present value of an annuity due of 5 years with 5% aeir with payments of 100. (Answer: $454.60)
will output 454.595050416236.
The calculator is not nearly complete, however, I wanted to share my work thus far. I still need to add abilities for the function to be able to calculate an unknown number of years as well as an unknown interest rate. Furthermore, I would also like to extend these functionalities to try to solve for the present and future values of increasing and decreasing payment annuities. In the future, once the functions are finished, for the most part, I would like to publish these functions of PyPi to give actuaries and programmers around the world access to these financial mathematics capabilities.