Do Yourself a Favor

For a chronological index of my path to the CFA, click here.

Just a quick suggestion today to do yourself a favor and go through your calculator manual to really learn all of its financial functions before you get too far into the CFA study guides.

After breezing through Ethics & GIPS, I made the mistake of starting on the problems in the Time Value of Money (TVM) chapter in Volume 1 without doing so.

This turned out to be a big time-waster because the 12C has all sorts of short-cut functions that save you from having to write down formulas on scratch paper, manipulate with algebra to solve for your variable of interest, and then plug-and-chug with the calculator.

One thing I really wasted time on was not knowing about the BEG and END buttons.

These are useful if you’re making annuity computations but in some cases payments start at the beginning (BEG) of each period and in other cases at the end (END).

I learned enough to know that the 12C could do it one way, but thought it was the only way.

So when payments happened the other way around, I had to do little tricks like leave off one of the payments & then add it back at the end to get the right answer.

Painful and easy to mess up…

Once I discovered BEG / END I went back and re-worked the TVM problems at lightning speed (well, maybe not lightning, but much faster).

This left me wondering if, for speed on the CFA exam, it’s even worth knowing how to derive & manipulate all the different TVM formulae when the 12C just gives you the answers much faster?

The CFA study guide doesn’t always present complete derivations of formulae anyway. In the section on ordinary annuities, they start off with one equation:

FVN = A * [(1+r)N-1 + (1+r)N-2 + … + (1+r)0]

and then they say that it “simplifies to” a second shorter equation:

FVN = A * [((1+r)N – 1) / r]

with no mention of how they got there (multiply both sides by (1 – r) as shown here).

In addition to working through your calculator manual, if you’re using the 12C I’d highly recommend TVMCalcs.com’s HP 12C Tutorial.

I haven’t worked through the entire thing yet, but here are two helpful bits I came across:

1. Perpetuities: The 12C can’t really do a perpetuity, in the sense that you can’t enter infinity for the payment period (n). But you can do perpetuity calculations by using the same functions used for annuities, with n set to a large number. See TVMCalcs.com’s Example 2.6.
2. Solving for n: Perhaps answering my earlier question about how much knowledge of formulae is required, I found a case where the 12C actually gives the wrong answer. Briefly, if you enter a present value, desired future value, and interest rate and tell the 12C to solve for n, the 12C always returns an integer. See TVMCalcs.com’s Example 1.2. If you’re using a 12C, be sure you know about this.

I don’t know yet whether I’m relying too much on the old 12C – it seems like it’s doing most of the heavy lifting. But the practice problems at the end of the section will give insight into whether this is how it’s supposed to be.

9 thoughts on “Do Yourself a Favor”

1. Jassi says:

Hey Man, good work- Here is what I am doing. I have both 12C and TIBii Pro- Bit of a work as I am so used to 12C. ( I am doing a finance Degree)

I have found out, there are somethings I am comfortable doing on 12c and some in Ti. Just how I see it and I think I getting used to two different calculators now. Maybe you should think about it too!

All the best!

2. Lumilog says:

Hey thanks Jassi. Never thought about 2 calculators – I will keep that in mind. So far I really like the 12C but I’m still getting up the learning curve.
-Lumilog

3. HAi mate ,

i would be enrolling for level 1 cfa soon , gr8 blog and myself a investment assocaite workin in dubai ,would keep u in my blogroll

keep bloggin and the good times rollin

cheers
sai

4. Eva says:

Hi there,
Your blog is truly helpful. I’m a complete novice in the field of financing, but am thinking about enrolling for the exam.
Just a quick question: what made you choose HP over Ti? Any particular features?
All the best!! I’ll keep reading!
Take care,
Eva

5. Lumilog says:

Thanks for the comment, Eva.

I really didn’t spend more than 30 seconds choosing which calculator. I have a different model HP calculator (the 48G) that I’ve used for engineering work for years so I thought the learning curve would be faster if I just sticked with HP.

Hope this helps,
Lumilog

6. Someone should do a comparison of the financial calculators? I think I’ve heard three on this blog: BAII, 12C? What’s the difference and why are these being used and also do financial professionals use these regularly or do they use a web emulator for these? I wonder if there’s a CFA industry standard or Financial Professional Calculator survey around?

7. Drymartini says:

Hi,
Long time lurker, first time poster. Love your blog. I signed up for June 2006 Level 1 a few weeks back.

I got the BAII but am wondering if I made a mistake. I love the calculator but how will we be using it options valuation ? from what i understand BAII cant do black scholes but HP 12C can be programmed.

am i right?

btw, keep up the good work.

8. Lumilog says:

Hi Drymartini,

Glad you’re enjoying the blog and you better start studying big time if you plan to be ready by 2006! 😉

Re: the calculator, even though I picked the 12C – just b/c I am used to HP calculators – I’ve overwhelmingly gotten comments that the BAII is the way to go and almost no one uses the 12C.

Haven’t gotten to derivatives yet so I unfortunately can’t answer the Black-Scholes question.

– Lumilog