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TIME

SAVING
TIPS!
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Time-Saving BA II Plus™ Settings 2nd INV HYP COMPUTE ENTER SET DEL INS BGN RAD

Most FRM® candidates use the BA II Plus™ calculator, because


of its intuitive and easy to learn keystrokes.
QUIT SET DEL INS
This short overview explores optimal settings for the FRM® CPT ENTER ON|OFF
exam and points out some useful time value of money (TVM)
and amortization (AMORT) calculations. By learning some 2ND
xP/Y
CF
P/Y
NPV
AMORT
IRR
BGN CLR TVM
simple keystrokes, you can answer questions faster with more N I/Y PV PMT FV
accuracy on exam day. K RAND

% 2
1/

Review the GARP calculator policy for the FRM exam here HYP SIN COS TAN !

INV ( )
e DATA STAT BOND nPr

LN 7 8 9
ROUND DEPR % BRKEVN nCr

Optimal Calculator Settings STO 4


DATE
5
ICONV
6
PROFIT ANS

RCL 1 2 3
There are two recommended calculator formats. CLR WORK MEM FORMAT RESET

To access the BA II Plus™ format options: CE|C 0 .

• Press 2nd [FORMAT]

The default number of decimal places for the


display is 2. To change the number of decimal • Press 2nd [QUIT]
points to 9 for floating decimal, which is optimal for This will exit the format function and the display will
the FRM® exam: show 0.
• Press 9 ENTER TIP: The calculator will revert to the factory
NOTE: Only the display is affected by decimal defaults when you remove the battery. You should
settings. The calculator’s internal records keep as buy a spare battery (type CR2032) and keep it
many as 13 places after the decimal, as needed. handy in case your battery goes flat. All models
of the standard BA II Plus, including the newest
Next, use the up arrow button to scroll up to the ones, require a screwdriver to replace the battery.
display showing with Chn or AOS. The factory The Professional version does everything that
default is Chn. To change to the optimal AOS the standard BA II Plus does, however, it has a
(algebraic operating system): removable slot on the back cover to replace the
battery. We recommend the BA II Plus Professional
• Press 2nd [SET] version because of the ease of replacing the
battery. It will cost about double the price, but the
TOP TIP: AOS recognizes the hierarchy of convenience and piece of mind are worth it.
operations, so exponents will be calculated first,
followed by multiplication and division, then NOTE: The proctors can inspect your calculator at
addition and subtraction. This is ideal for the FRM® any time during the exam, not just when you check
exam because the AOS setting minimizes the need in. If you are somehow caught with an unapproved
for the use of brackets or the need to break down calculator, a violation report will be written and
calculations into smaller sub-calculations. your answer sheet will not be graded.

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EfficientLearning.com/FRM

Time Value of Money Worksheet TIP: You should perform this step before each TVM
calculation. Note that you cannot clear the TVM
The time value of money (TVM) worksheet is an worksheet using 2nd [CLR WORK].
invaluable tool for pricing a bond based on the
bond’s yield-to-maturity (YTM). It also allows you to • Press 10 N to input the number of the semi-
calculate the YTM of a bond quickly. annual periods.

The TVM worksheet keys used to price a bond are: TIP: Do not press [ENTER] when inputting data into
the TVM worksheet.
N for the number of periods of discounting
• Press 2 I/Y to input the semi-annual YTM.
I/Y for the interest (discount) rate per period
TIP: Input the yield as a percentage figure, not a
PV for the present value of the future cash flows decimal.
PMT for the periodic coupon (must be the same • Press 30 PMT to input the semi-annual
for each period) coupon.
FV for the par value at the bond’s maturity • Press 1000 FV to input the par value of the
bond at maturity.
Let’s explore how you can use the TVM worksheet
to price a 5-year $1,000 par value bond paying a • Press CPT PV to calculate the bond’s price.
6% coupon on a semi-annual basis when the yield
to maturity is 4% (or 2% semi-annual). The price The display shows the answer PV = -1,089.82585.
of the bond is calculated as the present value (PV) The negative sign indicates that an investor would
of its future cash flows, which include the periodic be prepared to pay $1,089.83 for the 5-year bond
coupons and par value at maturity. today in order to receive the bond’s semi-annual
coupon and par value cash flows over the next 5
Check that the P/Y setting for number of payments
years.
per period is 1.

• Press 2nd [P/Y] 1 ENTER to set P/Y to 1 (this Alternatively, an exam question might ask you
should be your default setting) to calculate the YTM of a bond. Suppose that the
bond is a 5-year $1,000 par value bond paying a 6%
• Press 2nd [QUIT] to exit the P/Y function. coupon on a semi-annual basis, currently priced at
$918.89. The semi-annual coupon is $30 and there
This setting requires you to input the periodic cash are 10 semi-annual periods (as before).
flows and discount rate into the calculator (this
could be a monthly, semi-annual or annual figure • Press 2nd [CLR TVM] to reset all of the TVM
depending on the question) so that the bond’s cash inputs to zero.
flows can be discounted correctly.
• Press 10 N to input the number of the semi-
For the 5-year, $1,000 par value bond above, the annual periods.
semi-annual (periodic) coupon is 3% (half of the
annual coupon of 6%) of par value or $30. The semi- • Press 918.89 +/- PV to input the bond’s
annual yield to maturity (discount rate) is 2% and current price.
there are 10 semi-annual periods in the 5 years to
bond maturity. TIP: Enter the bond’s price as negative number. As
previously explained, the negative sign denotes
• Press 2nd [CLR TVM] to reset all of the TVM what an investor would be prepared to pay for the
inputs to zero. bond today.
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EfficientLearning.com/FRM

• Press 30 PMT to input the semi-annual • Press 100000 PV to input the amount of the
coupon. mortgage loan received.

• Press 1000 FV to input the par value of the Leave FV at zero since a repayment mortgage does
bond at maturity. not have a balloon payment at maturity.

• Press CPT I/Y to calculate the bond’s YTM • Press CPT PMT to calculate the monthly
on a semi-annual basis. repayment.

The display shows the answer I/Y = 4.000013523 The display shows the answer PMT = -644.3014015,
(recall that this is a percentage figure, not a which is the amount that will be repaid by the
decimal). Since the cash flows were input on a semi- borrower each month for 25 years.
annual basis, the answer represents the bond’s YTM
on a semi-annual basis. The bond’s YTM would be An exam question may require you to calculate the
quoted as 8% (twice the semi-annual YTM). mortgage loan principal outstanding after 6 months
and/or the amount of principal repaid in the sixth
Amortization Worksheet month only. This is a time consuming calculation
if done from first principles but is quickly achieved
The amortization (AMORT) worksheet is used using the AMORT worksheet.
together with the TVM worksheet to simplify the
analysis of amortizing securities such as fixed rate Once you have calculated the monthly repayment
mortgages and high coupon bonds. Accessing the above using the TVM worksheet (an alternative
AMORT worksheet allows you to quickly calculate question may give you the monthly repayment and
the outstanding principal of a mortgage/bond and ask you to calculate the mortgage rate), you can use
the amount of principal repaid at any point in time the AMORT function.
prior to maturity.
• Press 2nd [AMORT] to access the AMORT
Consider a 25-year $100,000 repayment mortgage worksheet.
with monthly payments in arrears. If the fixed
TIP: You do not need to clear the display before
rate on the mortgage is 6%, you can use the TVM
accessing the AMORT worksheet.
worksheet to calculate the constant, monthly
payments required to repay the mortgage over The display shows P1 = 1 (default value if you have
25 years. There will be 300 monthly payments not used the worksheet before). P1 denotes the start
(beginning a month after the mortgage is taken out) point for the range of payments that you want to
and the monthly mortgage rate is 0.5% (1/12 of the calculate while P2 (which you will access using the
annual fixed rate of 6%). down arrow) denotes the end point. For example, if
you want to determine the mortgage loan principal
TIP: Keep P/Y at 1 and remember that you are now
outstanding at the end of the sixth month and the
applying monthly discounting with monthly cash
amount of principal repaid in the sixth month only,
flows.
you would set P1 = 6 and P2 = 6. Alternatively, if you
• Press 2nd [CLR TVM] to reset all of the TVM want to determine the amount of principal repaid
inputs to zero. in the fifth and sixth months, you would set P1 = 5
and P2 = 6 (the calculator would also determine the
• Press 300 N to input the number of the mortgage loan principal outstanding at the end of
monthly periods. the sixth month in this case).

• Press 0.5 I/Y to input the monthly mortgage To answer the question above, let’s enter values for
rate. P1 and P2 now.

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EfficientLearning.com/FRM

• Press 6 ENTER to input the P1 value. The display shows INT = -496.3562088. As discussed,
this is the amount of mortgage interest in the sixth
• Press the down arrow to display the P2 value month.
(this shows the value for P2 that was used
most recently). If you want to determine the total amount of principal
and/or mortgage interest paid in the fifth and sixth
• Press 6 ENTER to input the P2 value. months, use the up arrow to return to the P1 display.
• Press the down arrow. • Press 5 ENTER to input the P1 value.
The display shows BAL = 99,123.29656. This is the Leave the P2 value unchanged at 6, then scroll down
mortgage loan principal outstanding after 6 months. to check the values for BAL, PRN and INT. The BAL
• Press the down arrow. value is unchanged since it displays the mortgage
loan principal outstanding after 6 months. The PRN
The display shows PRN = -147.9451927. This is display now shows PRN = -295.1543397 representing
the amount of principal repaid in the sixth month the amount of principal repaid in the fifth and sixth
only. Note that this is not the same amount as months. Similarly, the INT display now shows INT =
the monthly repayment of 644.30 because each -993.4484633 representing the amount of mortgage
monthly repayment consists of a combination of interest paid in the fifth and sixth months.
interest and principal repayment. The amount
of mortgage interest in the sixth month is the The TVM and AMORT worksheets will enable you
difference between these two amounts. to answer these types of exam questions quickly
and accurately, so be sure to put in plenty of
• Press the down arrow. practice before your exam day!

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