0C. Introduction to Time Value of Money (TVM) Calculations for CFA Level 1 (with Examples)

Hi, in this post, we will talk about the TVM calculations.

Time Value of Money or TVM calculations are one of the most fundamental calculations that you need to know for the CFA exam.

Before we discuss how to do the TVM calculations, check your BA II Plus calculator to ensure that :- 

a.) the no. of digits after decimal is at least 6, and,

b.) the P/Y value is set to 1. 

If you don’t know how to do this, please watch our video CFA Calculator: Introduction and Settings :-

Now, ensure that you are familiar with the following keys on your BA II Plus calculator:-

• PV key which is used for Present value or Current Value or Value at time 0

• FV key which is used for Future value or Value at time t

• N which signifies Number of compounding periods

• I/Y key which is used for Interest rate per compounding period

• PMT key which is used for Per period payments or Annuity payments, or constant periodic cash flow

• CPT key which signifies Compute or calculate

Remember FV = PV(1 + I/Y)^N

Drawing a time line

The next thing I will talk about is the significance of drawing a time line, a chronological order of events in any Quantitative calculation for CFA exam. Before you start solving any TVM calculation; I would strongly recommend drawing a time line of events. This is nothing but a linear representation of various data that is provided in the question.

This is important because most of the times you are trying to compare investments at a specific point in time. If you compare investments at time 0, you are comparing present value; while if you compare investments at time t, you are comparing future value.

The easiest way to understand this is through examples. So let’s solve a few examples:-

Example 1

Let’s say we want to find the value of an Investment of a 1000$, 3 years from now. What other piece of information we need?

We definitely need the Interest rate, because we need to know at what rate our investment can earn money for us. Let’s say the Interest rate is 10%.

What else?

We also need to know the frequency of compounding, i.e. how frequently will we earn interest on our interest.

Let’s say we are compounding annually.

Also, Remember FV = PV(1 + I/Y)^N

So,

After 1^st year the value of our investment will be PV(1+I/Y) = 1000(1+ 0.1) = 1000 *1.1 = 1100

After 2^nd year the value of our investment will be PV(1+I/Y)²  = 1000(1+ 0.1)²  = 1000 *1.21 = 1210

After 3^rd year the value of our investment will be PV(1+I/Y)³  = 1000(1+ 0.1)³  = 1000 *1.331 = 1331

Let’s draw a graph of the values we obtain here:-

As you can see, our investment of 1000$ became 1100$ after a year, 1210 after 2 years and 1331 after 3 years. We are progressively earning more Interest every year, because we are earning interest on interest, i.e. compound interest.

If you are having difficulties understanding this, you should revise Compound Interest concepts.

So, how do we do this in BA II Plus calculator?

For this example :-

PV=1000;  N =3; I/Y=10; PMT=0; and we need to find out FV

If you have any issues solving this, watch this video :-

As you can see, using the BA II Plus calculator makes these calculations very simple.

Example 2

Let’s say we want to find the value of an Investment of a 1000$, 3 years from now, compounded semi-annually. The rate of interest is 10%.

Let’s draw a timeline:-

As we are compounding semi-annually,

PV=1000;  N =6; I/Y=5; PMT=0; and we need to find out FV

If you have any issues solving this, watch this video :-

Example 3

Let’s say we want to find the present value of an Investment which yields 1331$, 3 years from now. The rate of interest is 10% compounded annually.

Let’s draw a timeline:-

As we are compounding annually,

FV=1331;  N =3; I/Y=10; PMT=0; and we need to find out PV

If you have any issues solving this, watch this video :-

Example 4

Let’s say we want to find out in how many years will an initial investment of 1000$, yield 1331$ if the rate of interest is 10% compounded annually.

Let’s draw a timeline:-

As we are compounding annually,

FV=1331;  PV = 1000; I/Y=10; PMT=0; and we need to find out N

Did you get an error when using the values above? WHY?

Let’s watch this video

Example 5

Let’s say we want to find out at what Interest rate will an initial investment of 1000$, yield 1331$ in 3 years, if the interest is compounded annually.

Let’s draw a timeline:-

As we are compounding annually,

FV=1331;  N =3; PV=-1000; PMT=0; and we need to find out I/Y

Let’s watch this video

As you can see, we can find out any missing information as long as we are provided with rest of the values.

You can watch a video explaining the points discussed in this blog here :-

If you have reached this far in this blog, congratulations! You can now start practicing TVM calculations on your own.

We will discuss Cash Flow calculations in the next blog.

For more CFA tips watch the posts in this blog. You will also find a number of CFA topics discussed on this blog in simple 

0B. CFA: Myths and Tips

Hi, in this post we will talk about some tips and tricks to ace the CFA exam. Please remember these tips are being provided by someone who is a full time working professional and comes from a non-finance background. So, if you do come from finance background, or if you are a student or a part time working professional, these tips will be even more effective.

Right, so, let’s talk a little bit about the CFA exam. Everyone knows that CFA exams are tough, no questions about that. They are intense; require a lot of preparation and determination. You have to understand a lot of concepts, and then be able to apply them in a time-constrained environment. Sounds fun, right!!

Now, I am sure you are aware that the CFA exams consist of 3 levels, Level I, II and III, each of which is a 6 hour exam (that is two 3 hour sittings). You must also be aware that Level I exam is offered twice, while Level II and III are offered only once every year.

There is no doubt that you have to work hard, but what this video aims for is to suggest ways for you to work smart. So, here are some myth busters first:-

1.) You need about 250-350 hrs. of preparation à This is my favorite myth. There is no magic number of hours. People have cracked CFA exam with just 2 months of intense preparation, and there are candidates who have failed these exams after preparing for years. 

It’s about the quality of time you put in, not the quantity.You need to be able to self-analyze and adapt while you are preparing for the exam.

2.) You should focus just on the problems and practice a lot of themàNo, you shouldn’t! CFA is not just any exam; it is THE exam to prove your worth in the financial world. The CFA curriculum prepares you for the challenges in the world of investment and global finance. This is an investment in your career, so please understand the concepts, be able to reason your approach. Plus, it is much easier to ace the exam if you understand the concept, rather than just mugging up a few tricks to solve a specific set of question.

3.) Focus on the topics that have the highest weightage and complete them firstà In my opinion, the CFA curriculum is designed so that there is a logical flow of ideas and concepts from one study session to another. I strongly recommend following the order of the study sessions in the curriculum. Yes, you can complete Ethics at the very end, but for rest of the topics, please follow the order of the curriculum.

And again, these materials are preparing you for your future career. Do not skip or underestimate any topic. There is a reason why CFA institute gives you a description of how you performed in each topic area, rather than just PASS/FAIL result.

4.) You can pass the exam by just using XYZ prep provideràCFA curriculum is the most extensive material that you can use to prepare for the exam. There is no shortcut to success. Candidates may have cleared the CFA exam by just using a specific prep provider, but this is a gamble. Are you willing to bet months of your preparation on this? Also remember that what you study in Level I will be used in Level II and III. Similarly what you study in Level II will also be used in Level III. If you use shortcut in the initial level, chances are it will come to haunt you later on.

5.) CFA candidates do not have a social circle or a lifeàCFA is not a sprint, it’s a marathon. To be successful in this race you will need to have a balanced life style. Make a time table, set yourself targets, but do not forget to relax your brain from time to time. Go out with friends, watch a movie: recharge your brain because it will need it. Always remember it’s the quality of time that is important rather than the quantity.

Now that we have discussed some of the popular myths, it’s time to discuss my 12 basic tips to ace the CFA exams:-

1. Start early: I cannot stress this enough. The sooner you enroll in the program and start preparing, the better it will be.

2. Analyze the curriculum before you make a plan: Read the study sessions. It’s ok if nothing makes sense. You are only trying to analyze how easy or difficult each topic is. Take notes about your familiarity with any topic.

3. Develop a Study Plan: Once you have analyzed the curriculum, develop a study plan. Break the curriculum into manageable chunks. Do not write finish Study Session X in 3 weeks. Break it into daily tasks. Have a target set for each day.

4. Be organized while studying:  Make notes about concepts that were difficult. Write down formulas in a A3 size paper and keep it in front of your place of study. Note the questions you couldn’t solve on your own. Analyze the mistakes you made and the reason for the same.

5. One day per week for revision: I strongly recommend keeping one day in the week free. You can use this day to catch up with whatever you missed during the week as well as revise everything you have studied in that week. Plus, if you complete all your tasks early, you can go out or watch a movie. This acts as positive reinforcement and breaks the continuous cycle of pressure study.

6. Stay true to your goal: CFA is a long battle: everyone feels frustrated at some time or other. You have to stay patient and focus on the bigger goal. If you get stuck, work your way out of it.

7. Use the buddy system: If you have any friend who is also preparing for exam, prepare together. Join WhatsApp group for CFA candidates, become a member of LinkedIn group for CFA candidates. Use all the help you can get.

8. Use Notes/Flash cards: Make flash cards with your notes. Whenever you have some free time, read through your notes or flash cards, like when you are waiting in queue somewhere.

9. Don’t be afraid to modify your schedule: No matter how good a planner you are, there will be topics that will take more time than you initially planned. Do not be afraid to adapt and modify your schedule.

10. Aim to finish the syllabus 2 months before the exam: Aim to finish the entire syllabus 2 months before the exam. This means completing the entire syllabus cover to cover, no excuses.

11. Take Mock tests and analyze your performance: In the 2^nd last month, take the topic wise mock tests and analyze each one of your responses. Highlight areas of improvement. Revise the entire syllabus with strong focus on areas of improvement. Take practice tests in the last month before the exam and analyze your performance.

12. Day before the exam: As far as possible, do not try to solve any problem a day before the exam. If you are not able to solve any problem, it will stress you. Have a light dinner and a good night’s sleep. Trust your preparation and trust yourself. Don’t forget to have all the items ready that you will be taking to the exam: Calculator, extra batteries, pencils, pens, erasers, passport, exam ticket, spectacles (if you use them), etc.

“If you can dream it, you can do it”. All The BEST.

You can watch a video explaining the points discussed in this blog here :-

For more CFA tips watch the posts in this blog. You will also find a number of CFA topics discussed on this blog in simple terms.

0A. CFA Calculator: Introduction and Settings

Introduction

Hi, today we will discuss the different types of calculators you can use in the CFA exam and some basic tips and tricks to ensure that your initial settings are appropriate for CFA exam.

If CFA is a battle, your Calculator is your weapon of choice and you don’t want to choose the wrong weapon to fight this long battle J

CFA Institute allows only two calculator models and you want to ensure that you prepare using one of these two models :-

• Ø Texas Instruments BA II Plus^® (including BA II Plus Professional)
• Ø HP 12C^® (including the HP 12C Platinum, 12C Platinum 25th anniversary edition, 12C 30th anniversary edition, and HP 12C Prestige)

Please remember to check the CFA Institute’s calculator policy at this link http://www.cfainstitute.org/about/governance/policies/Pages/calculator_policy.aspx

My weapon of choice

I prefer Texas Instruments BA II Plus; because it’s simple and user friendly. 

However, you should try your hands on both the calculators before you make a choice.

The rest of this video assumes that you are using a Texas Instruments BA II Plus calculator.

Change Initial Calculator Settings

1.) Change the number of digits after decimal: I recommend having 6 digits after decimal. 

Please note that the default setting for BA II Plus calculator is to have only two digits after decimal.

The easiest way to check this is to divide 1 by 3 and see how many digits you get after decimal.

As shown in the picture here, the calculator has only 2 digits after decimal.

To change this, do the following:-

A.) Press 2^ND to enable the functions printed on top of each button

B.) Press FORMAT

C.) Press 6 as now you want to have 6 digits after decimal

D.) Press ENTER to finalize your choice

E.) Press 2^ND again to enable the functions printed on top

F.) and finally Press QUIT

Check that the steps worked by dividing 1 by 3 again.

As shown in the picture here, the calculator now has 6 digits after decimal.

2.) Changing periods per year to 1: The default setting for BA II Plus calculator is to have 12 periods per year. This is not ideal for CFA exams as CFA calculations deal with only one period per calendar year.

To change this, do the following

A.) Press 2^ND to enable the functions printed on top of each button

B.) Press P/Y button

C.) Press 1 as now you want to have 1 period per year

D.) Press ENTER to finalize your choice

E.) Press 2^ND again to enable the functions printed on top

F.) and finally Press QUIT

Now you are ready to start using your weapon for the CFA battle J

You can watch a video explaining the points discussed in this blog here :-

For more calculator tips like Time Value of Money calculations and Cash Flow calculations watch the posts in this blog. 

You will also find a number of CFA topics discussed on this blog in simple terms.