Texas Instruments BA II Plus (TI BA II+)

Texas Instruments BA II Plus (TI BA II+). Essential functions for the F...
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02 Nov 2007 by David Harper, CFA, FRM, CIPM
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I received a few queries this week asking, "what calculator functions do I need to know for the FRM?" Of
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course, you need to know the mathematical operations. Be able to clear to the default settings. Make sure you understand the time value of money (TVM) settings: you do not want beginning-of-period payments; you do want end-of-period payments (END). You may want to change the number of decimals displayed: 2nd Format, #, ENTER. You should be able to take square root, square a number, and take a factorial (e.g., 8! = 40,320) Beyond the basic functions I just listed, you also want to be able to (i) use the natural function [LN] and its inverse, the exponential function, (ii) use the universal power key (that allows you for example to raise to the nth power, or take an nth root), and importantly, (iii) you need to be able to use all five time value of money (TVM) functions. These are the same keys we use for bond pricing problems because bond math is essentially about the time value of money. So, N corresponds to number of periods, I/Y corresponds to yield to maturity (YTM), PV corresponds to price, PMT corresponds to the coupon payment, and FV corresponds to par or face value. The cram session tutorial that I published today starts with a quick review of these keystrokes. Here are ten problems that will test your ability to use these calculator functions. If you are unsure of your calculator, please work each of these! 1. What is the value of $10 at the end of one year, if we compound continuously @ 10%? 2. What is the value of $10 at the end of three years, if we assume continuous compounding of 5% in first year, 4% in second year and 3% in third year? 3. If $70 grows to $90 over two years, what is the implied rate of continuous compounding? 4. What is the compound annual growth rate (CAGR) if $20 grows to $40 over four (4) years 5. What is the bond price for a $100 par bond with 3 years to maturity, a 6% yield (YTM), and that pays a 4% semi-annual coupon. In other words, assume semi-annual compounding as the coupons are paid every six months. 6. What is the bond price for a $100 par bond with 3 years to maturity, a 6% yield (YTM) and that pays a 4% annual coupon. In other words, assume annual compounding as the coupon pays once per year. 7. What is the yield (the yield to maturity, YTM) on a $100 par bond with 3 years to maturity, a current price of $98, and that pays a 4% semi-annual coupon; i.e., assume semi-annual compounding. 8. What is the yield (the yield to maturity, YTM) on a $100 par bond with 3 years to maturity, a current price of $98 that pays a 4% coupon annually; i.e., assume annual compounding. 9. Update addition (Duration): What is the modified duration for a $100 par bond with 3 years to maturity that pays a 4% semi-annual coupon and yields 5% on a bond-equivalent basis. Use a shock of 20 basis points 10. How many different ways can we choose 3 objects from a total of six objects (i.e., "6 choose 3") if the sequence does not matter? And if the sequence does matter?
(1) Continuous compounding of $10 @ 10% uses the exponential function:
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(2) Continuous compounding is additive! We can simply add them: 5% in first year + 4% in second year + 3% in third year = 12%:
(3) The inverse of continuous compounding in the natural log (LN). The continuous rate implied by growth of $70 to $90 over two years:
(4) To get the compound annual growth rate (CAGR) if $20 grows to $40 over four (4) years, we raise 2.0 (40/20 is the wealth relative) to the 1/4th power:
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(5) Bond price: 3 years to maturity, 6% yield, 4% coupon, $100 par. Assume semi-annual compounding.
(6) Bond price: 3 years to maturity, 6% yield, 4% coupon, $100 par. Assume annual compounding. Note the price is slightly higher.
(7) Bond Yield: 3 years to maturity, $98 price, 4% coupon, $100 par. Assume semi-annual compounding (semi-annual pay). But note the answer of 2.36% is a six-month rate! The bond-equivalent yield is 4.72%.
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(8) Bond Yield: 3 years to maturity, $98 price, 4% coupon, $100 par. Assume annual compounding (annual pay). Note the rate of 4.73% is just slightly higher than 4.72% calculated above.
(9) Modified duration for a $100 par bond with 3 years to maturity that pays a 4% semi-annual coupon and yields 5% on a bond-equivalent basis. Use a shock of 20 basis points. To use the TI BAII + Professional's built-in bond worksheet, see Telon's example in the comments below (thank you Telon!). To manually compute, please note the 5% is on a bond-equivalent basis. That means the semi-annual (six month rate) is 2.5%. Duration involves re-pricing the bond three times: current price, price with shock up (@ 5.2%) and price with shock down (@ 4.8%). The shock is arbitrary and won't make much of a difference. Although I am showing full keystrokes, you don't need to re-key everything; you only need to relevant input (I/Y), re-compute (CPT) and store that to a variable (e.g., STO 1). But, assuming six month periods, the three steps give a duration a modified duration of about 2.78. (Make sure you know that translates into a Macaulay duration of 2.85 = 2.78[1+5%/2].)
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(10) The combination is 20 and the permutation is 120 (permutations is always higher. Permutation is equal to combinations multiplied by r!. In this case, 20 x 3! = 20 x 6 = 120):
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patrickkore 03 Nov 2007

Answer to 1 question comes out as 1.3499. am I doing anything wrong on TI BA Plus
2.
patrickkore 03 Nov 2007

panick attack sorry. I was entering wrong data
3.
southsouth 03 Nov 2007

Is there any quick way to calulate the duration of a bond by TI BA Plus or professional?
4.
David Harper, CFA, FRM, CIPM 03 Nov 2007

southsouth, As someone noted on the forum, there is a bond worksheet on the TI BA II+ Professional and it computes modified duration. (page 56 of the pro manual). It works fine although, IMO, I am a bit more error prone with the worksheet (input assumption) and I prefer to apply the duration formula. On the Pro, I think the bond worksheet is great, I would just practice to get comfortable. (but i think manual use of the TVM is just as fast, frankly) The TI BAII+ (not professional) does not, to my knowledge, have built in duration.
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Telon 03 Nov 2007

David is right. The TI BA II Plus doesnt have the built-in Duration but the TI BA II Plus Professional does. Secondly, note that the bond worksheet gives only the Modified Duration and not the Macaulay Duration. You must know how to convert from Modified Duration to Macaulay Duration (and vice versa). Thirdly, when using the bond worksheet for Modified Duration, you use the nominal yield and not the effective yield. Problem 1 Bond face $100 Coupon 4% semiannual Term to maturity 3 years Yield to maturity 5% annual effective. Use BA II Plus Professional Bond Worksheet, calculate the duration (i.e. Macaulay duration) and the modified duration. Solution BA II Plus Professional Bond Worksheet uses the Wall Street convention in quoting a bond by using a nominal yield to maturity. As a result, when Bond Worksheet calculates the price and the modified duration, it uses the nominal yield that compounds as frequently as coupons are paid. We need to find, y , the nominal yield compounding twice a year (coupons are paid twice a year): [1+y/2]^2 = 1 + 5% y = 4.939% (just enter 4.939 and not 4.939% or 0.04939) So this is the value you input for the yield and not 5%, in finding your Bond Price and Modified Duration and the subsequent Macaulay Duration. Answers: Bond Price = $97.41, Mod. Duration = 2.78567, Macaulay Duration = 2.85446. Problem 2 (Bond Not Redeemed at Par) Bond face $100 Coupon 4% semiannual Term to maturity 3 years Yield to maturity 5% annual effective. Redemption $110 Use BA II Plus Professional Bond Worksheet, calculate the duration (i.e. Macaulay duration) and the modified duration.
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Solution Compared with Problem 1, Problem 2 has a bond not deemed at par. When calculating the duration of a bond not deemed at par using BA II Plus Professional Bond Worksheet, we need to convert such a bond to a bond redeemed at par. Such as conversion is needed because BA II Plus Professional Bond Worksheet can NOT calculate the duration of a bond not redeemed at par. If we dont convert a non-par bond to a par bond, BA II Plus will give a wrong result. Let see. Key strokes in BA II Plus Professional Bond Worksheet: 2nd Bond This activates Bond Worksheet. Enter SDT=1.0100 This sets SDT=1-01-2000 We arbitrarily set the purchase date of the bond is to 1/1/2000. Enter CPN=4 Set coupon = 4% of par. Enter RDT=1.0103 This sets RDT=1-01-2003 RDT = redemption date We set RDT=1-01-2003 (the bond has a 3 year maturity). Enter RV=110 Redemption value. Day counting method Use 360 counting method Coupon frequency 2/Y (i.e. twice a year) YLD=4.939015332 Dont enter 4.93901532% CPT PRI (compute price of the bond) We get PRI=106.0496293. This is the bond price. This price is correct. AI=0 Accrued interest is zero. DUR=2.78567468 Notice anything strange here? Even though the bond in Problem 2 is different from the bond in Problem 1, BA II Plus gives us the same modified duration (Wall Street version of modified duration). Something must be wrong. We can overcome this issue by converting a non-par bond into a par bond. In this problem, the conversion goes like this: new coupon rate = [original coupon rate x par]/redemption value = [4% x100]/110 = 3.63636364% Using this new value in the worksheet will give us the right Modified duration of 2.7972.
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Note that when you do the first calculation you have the Bond Price right at $106.0496293 but the Modified duration was wrong. The second calculation (to find the right Duration) in the bond worksheet using the new coupon rate would also give another bond price. This second bond price is wrong and must be ignored. Finally, for convexity finding the V-, V+, Vo (all these are PVs at y-, y+ and y0 respectively) works better since the calculator has no in-built function for Convexity. To find the PVs, use the TVM function, adjusting the just the I/Y each time to compute the new PV. You dont have to clear the TVM memory whilst doing this since its only the Ys that are changing to find new PVs. This does not change Davids advice about how to go about the Bond pricing and the Duration. Its just to show how TI BA II Plus professional can be used to do the same thing.
The TI BA II Professional is a very versatile calculator and I would advice anyone taking the exams next year and beyond to get the calculator earlier and master it before the 11th hour. Besides the normal calculations, you need to know how to set your calculator to run in the AOS (Algebraic Operating System) mode, and how to make maximum use of the memory function. Telon 6.
David Harper, CFA, FRM, CIPM 03 Nov 2007

Telon, Tremendous thanks for details on the Professional. Good point on effective annual yield (I deliberately demonstrate bond-equivalent yields because the Tuckman assigned reading takes this approach and at least two 2007 sample questions apply bond equivalents, so I am thinking about testability. But EAY is of course important to understand). I added a duration example above, should have included that.thanks again
7.
Telon 04 Nov 2007

Hi David. Its my pleasure. I sent you a PM about early registration for 2008. Kindly waiting for your reply. Thanks as usual. Telon
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Kuda 02 Nov 2008

Hi, can you see where Ive gone wrong here with the BA II Plus Professional. Im trying to compare both TVM and the Bond Worksheet result. But Im not getting the same values for YTM! FV = 1000 Coupon = 8% Semi-annual Maturity 15 years PV = -x5.5 Using the TVM functionality 1) 1000 [FV] 2) 40 [PMT] 3) -785.5 [PV] 4) 30 [N] 5) [CPT][I/Y] = 5.47 6) 5.47*2 = 10.942 With bond worksheet 1) [2nd][9] - to enter the bond worksheet 2) SDT : 1.0100 [Enter] 3) CPN : 8 [Enter] 4) RDT : 1.0115 [Enter] 5) RV : 1000 [Enter] 6) 2/Y 7) PRI : 785.50 [Enter] 8) YLD : [CPT] === I get 2.527012 The YLD using these two functionalities dont reconcile.
9.
Telon 03 Nov 2008

Hi Kuda, The problem was with your coupon payment in the TVM. If you have semi-annual coupon payment, then PMT must be (8%/2)*1000 = 4 and NOT 40. When you do that you get the same answer as you had in the bondsheet. Hope this helps.
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subhalakshmi ganesan 30 Nov 2008
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could you please tell me, how to use, root 5 on BA 2PLUS calculator. 11.
Gabe17 13 Apr 2009

Hello, I was curious if there is an easy way to calculate the average annual growth rate of say a companys revenues for the last 5 years. It seems like this would come in handy for stocks as well to get a better picture of the yearly fluctuations. I know how to calculate the CAGR, but if youre studying 5 years of data, the first and last years are only a fraction of the story. I was thinking it would be convenient if the calculator could ask you how many years of data, what the value is for each year, and figure out the average growth rate. Not sure if it will do this, but thanks for any help you can provide Cheers.
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David Harper, CFA, FRM, CIPM 13 Apr 2009

Hi Gabe, Yes, well, you can surely do it your way: take the series of annual returns/growth rates and average them. This gives a arithmetic average verus a geometric (CAGR). In my view, the CAGR actually contains more information: CAGR roughly = arithmetic average - variance/2. So, the greater the volatility, the larger the difference btwn arith and geo average. I sort of think of the CAGR as volatility-adjusted average; e.g, if no volatility, they are equal. Beyond that, it seems to me this is a limitation of a first moment sample statistic, its just a sample mean (arith) or sample median (geo) and, if we want to collect 2nd or 3rd or 4th moment information, we can do that as the return series is just a distribution. So, we can complement the CAGR with variance or semi-variance, or skew or heavy tail metrics. Not sure we can expect a lot more from the single statistic. David
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Hari12345 15 Sep 2009

Hi David, Is there a way to calculate bond PV with semi-annual coupon using HP-12c? I searched the board but did not find info on using HP 12c. May be I should buy TI BA II professional for the exam. Thanks.
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Sheryl 16 Sep 2009

Hi David: I really like the notes you provided. But it looks like the notes have only been updated to volume 4. Is that possible you update the notes for volume 5 and 6 too? Thanks so much!
15.
Hari12345 17 Sep 2009

Hi David, Solving the prob#6 by hand I get different result which matches what i get on HP12c. For instance, pv of $2 coupon every 6months at 3%=11,16, The pv of $100 face value =100/(1.03)^6=83.75. bond pv=11.16+83.75=94.91. This discrepancy exists for other problems as well. I get the same thing using TVM functions on HP. Your answer was 94.58. I cant believe such differences can exist. What is wrong? Thanks.
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David Harper, CFA, FRM, CIPM 17 Sep 2009

Hi Hari, The difference is my #6 is annual compounding, just to give practice in compounding, $94.58 is correct for semi-annual compounding. Compare: N=3, I/Y = 6, PMT = 4, FV = 100, CPT PV = $94.65 i.e., =PV (6%, 3, 4,100) = $94.65 to the same bond but with semi-annual compounding: N=3*2, I/Y = 6/2, PMT = 4/2, FV = 100, CPT PV = $94.58 ie., =PV (6%/2, 3*2, 4/2,100) = $94.58 ...and the semi-annual should be less than annual (like continous should be less than semi-annual)... ...so you are good, it is an issue of compound frequencyDavid
17.
Hari12345 18 Sep 2009

David,
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In HP 12c, if you have BEGIN on, then all payments are paid at the beginning of the period. This was the error. This affects discounting of coupon, but not the FV. That was confusing. After removing the begin, using g+END(on key 8), the answers matched. Thanks for helping solve the mystery, I was getting worried. 18.
koba 22 Apr 2011

Hi David, Could you please let me know how I can use the BA II Plus Professional to calculate forward rate from spot rate and vice versa? (if the calculator can do that) Thanks! isaac
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Texas Instruments BA II Plus (TI BA II+). Essential functions for the F...

Videos Articles Spreadsheets Study Notes Practice Questions Books Webinars

02 Nov 2007 by David Harper, CFA, FRM, CIPM

(1) Continuous compounding of $10 @ 10% uses the exponential function:

Risk (FRM) > Exam Relevance: Optional

Related E-Learning Courses

patrickkore 03 Nov 2007

patrickkore 03 Nov 2007

southsouth 03 Nov 2007

David Harper, CFA, FRM, CIPM 03 Nov 2007

Telon 03 Nov 2007

David Harper, CFA, FRM, CIPM 03 Nov 2007

Telon 04 Nov 2007

Kuda 02 Nov 2008

Telon 03 Nov 2008

subhalakshmi ganesan 30 Nov 2008

Gabe17 13 Apr 2009

David Harper, CFA, FRM, CIPM 13 Apr 2009

Hari12345 15 Sep 2009

Sheryl 16 Sep 2009

Hari12345 17 Sep 2009

David Harper, CFA, FRM, CIPM 17 Sep 2009

Hari12345 18 Sep 2009

koba 22 Apr 2011

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