Comments on: Annuity Baffles Area Man!

By: Spencer

Spencer — Thu, 30 Oct 2008 07:22:49 +0000

No it was something along the lines of if you invest X amount maybe 900 a month lets say for X years, say 30 years at an assumed realistic rate, say 6 % or even sp 500 10%, you would end up getting about 10,000 a month forever starting at the end of the 30 years.. sorry for taxing your memory

By: Lumilog

Lumilog — Mon, 06 Oct 2008 13:08:40 +0000

Hi Spencer,

Hmmm.. I haven’t heavily editing this post. Maybe it was:
http://luminouslogic.com/cfa-program-do-yourself-a-favor.htm

In either case, the general formula for valuing a perpetuity with a fixed payment is

Value = Payment / DiscountRate

So arbitrarily picking a 10% annual discount rate, a $12,000 perpetuity is worth $120,000 today.

Or said another way, if you put $120,000 into an investment vehicle today, providing 10% annual interest, it would give you $12,000 annually forever.

Hope that helps?
Lumilog

By: Spencer

Spencer — Mon, 06 Oct 2008 08:10:42 +0000

You used to have an equation here about a perpetuity and how to calculate it with 12,000 a year or something do you have that infp still? I’m trying to figure one out for myself.. thanks

By: najja

najja — Tue, 13 Nov 2007 01:30:26 +0000

Hi, I went back home and tried the calculation on my old HP12C model. My model has a blue “Nf” printed under Fv that enables one to repeat the previously entered CFn for less than 99 times. Therefore, after storing -26826.79 into CF0 and 594.69 into CFn, you just punch 60 into Nf, then click IRR, HP12C can get the correct IRR just fine. Which model of HP12C do you use? Mine is the classic model I think. You can find the instructions for Nf in the section called “additional financial functions in the handbook.

I love the cool look and RPN methodology it adopts, and it performs so beautifully! I have never used an advanced calculator before (I am a biology major). Though I think it’s a little inadequate in statistical functions, I doubt TA model is stronger in that…

By: Ray

Ray — Tue, 30 Oct 2007 15:47:22 +0000

Yes, I have the same feelings about the antiquation calculation of the calculator methodology and it does give me pause or at least raises reservations about the currency/applicability of the exam. In terms of design, I like the look of the HP but the cool digital videos regarding the TI I suppose make it a strong contender. I wonder if anyone here has investigated the online paratextual course cribs for the CFA. I found this one: http://www.stalla.com/ which looks interesting and another comparsion here: http://www.analystforum.com/cfaexam/testprep/level1/online.shtml Somebody, preferably a CFA candidate should do a cost value analysis here and publish it online!

By: Lumilog

Lumilog — Tue, 30 Oct 2007 01:23:00 +0000

Hi Ray,

As far as the exam goes, you are only allowed to bring in one of two calculator models as specified here.

I picked the HP b/c I used a similar model to get me through engineering courses in college. However my understanding is that I’ve picked incorrectly – most seem to prefer the TI for the CFA exams.

Personally I’d ditch these calculators and bring a laptop with Matlab to the test if they’d let me. But alas…

-Lumilog

By: Ray

Ray — Sat, 27 Oct 2007 14:13:21 +0000

Hi everyone,

I just also read through this and the first formula in the CFA “Quantitative Investement Analysis (2007) is:

FV= PV(1 +R)

Perhaps this can help. BTW I’m a young father with a baby seeing what you guys are up to (I’m not writing the exam).

I am curious about these calculators though. I haven’t used any of these and are they worth it? I heard that some of these are available on the web? Have you all chosen the same one or are there one or two top contenders?

By: Lumilog

Lumilog — Tue, 16 Oct 2007 10:03:29 +0000

Thanks Mick & DJ. I’m leaning closer and closer to getting a BAII. I see that Schweser also recommends the BAII…

DJ – my cash flow diagram begins with the initial payment at t=0 with the first payment happening 5 years later at t=60, and the last payment at t=119 for a total of 60 payments.

-Lumilog

By: DJ

DJ — Tue, 16 Oct 2007 02:25:09 +0000

btw, I also heard that BA II plus was strongly recommended for CFA exam rather than the HP version.

-DJ

By: DJ

DJ — Tue, 16 Oct 2007 02:23:53 +0000

this is what i did…

Part (a) my IRR was 6.049%
- $20,000 * (1+x)^5 = $26,826.79
- x = 6.049285%

Part (b) my IRR was 8.06796% and monthly was 0.6487% (i realized i added another period in my irr calculation or it would have been the same as yours)
- BA II Plus, I was able to do the IRRs without any trouble. (calc steps below)
1) [CF] -20,000 [ENTER] = sets inital cash outflow
2) [down arrow] 0 [ENTER] – sets cashflow 1
3) [down arrow] 60 [ENTER] – sets frequency of cashflow 1
4) [down arrow] 594.69 [ENTER] – sets cashflow 2
5) [down arrow] 60 [ENTER] – sets frequency of cashflow 2
6) [IRR] [CPT] – computes IRR

After computing IRR, I got 0.64867912 as monthly (once again please note that I used t0 – t120 in my calculation (121 periods).

Annualized will be (1 + 0.64867912%)^12 – 1 = 8.067961%

With 120 periods my results will be the same as yours so therefore I was wondering if I am suppose to use 121 periods or 120…I’m still not clear which one to use. Any clarification would be great! Thanks!

-DJ