Gostudymock3

Solving TVM Problems using your Financial Calculator



As a Candidate you are assumed to have a strong working knowledge of your financial calculator. If you want to pass L1 you better make sure that’s true! One type of problem you know you will need repeat multiple times on exam day is solving a TVM problem. Even on questions not directly tied to time value of money you may well need to convert between PV and FV as the final calculation step.

Don't get caught unprepared. 

Set up your calculator

There are two default settings you should switch now that will stand you in good stead for the vast majority of L1 problems.

  • First, you want to set the number of decimal places to 6 instead of 2. This will give you the specificity often asked for. To do this hit [2nd][.] to get to ‘Format.’ Then enter 6 for decimals.
  • Second, you want to change the periods per year [P/Y] from 12 to 1 to move from monthly to annual interest rates. To do this hit [2nd][I/Y] hit ‘1’ then enter. Then [2nd][CPT] to exit.

By setting P/Y equal to 1, any interest rate you calculate is now the effective interest rate for a given period, while N becomes the number of compounding periods in a given problem.[2]

For TVM problems the important keys on the BA II are:

N = number of compounding periods

I/Y = Interest rate per compounding period (often will be semi-annual)

PV = Present Value

PMT = Cash flow or annuity per period

FV = Future Value

You hit CPT to compute the answer.

The Steps to Solving TVM on your BA-II Plus

On the exam you will usually have enough information in a problem to input 4 of the 5 variables above, allowing you to solve for the missing number. The trick is not making a mistake while breaking down the given information into the variables for your calculator.

  1. The first thing you want to do is convert the given interest rate (r) and time period (N) into the same units as the compounding frequency.

So if a problem gives you the interest rate as an annual number and the time in years, but the loan has quarterly compounding you would divide r by 4 to get your quarterly interest rate (I/Y) and you would multiply the number of years by 4 to get N. T

This is the secret behind dealing with non-annual compounding.

  1. You would then input the FV or PV that was given.

When solving for PV, you either input the FV as a positive number and ignore the negative sign on PV, or you input FV as a negative number.

  1. If there is an annual payment (PMT), you would enter that, usually with a negative sign.
  2. Hit CPT and the key for the variable that is missing.

It is also extremely important to clear your calculator in between problems on the exam. If you don’t you are likely to forget to erase a variable and cause yourself to answer incorrectly.

Not using the BAII plus? Since almost all new Candidates are using the BA-II Plus that's what we focus on here (apologies).

Note: There is an excellent series of videos about using your TI BAII Plus which you can see here.

We also summarized the five most important takeaways from the Level 1 readings on TVM at https://gostudy.io/blog/Time-Value-of-Money-Reading-Most-Important-Takeaways 

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[1] Usually we’re dealing with semi-annual bonds, so you need to double the # of years for N and divide the annual interest rate by two.