Basic Time Value of Money Calculation with Calculator

CFA Level III
#1

I should definitely know this by now but… if you’re using the Time value calculations on your calculator to compute say for example - the number of years it will take to reach your investment objective of having $6,000,000 when you retire and you’re saving $60,000 a year. Why would you have to put a negative sign in for the PMT function? It doesn’t make sense to me.

In contrast, if you weren’t saving $60,000 a year and instead your salary wasn’t enough to cover your living expenses and you were in fact losing $60,000 a year after deducting living expenses from your salary - why would you have a + sign for that??

I should really know this but what is the thinking that I’m missing?

#2

Best way to remember, any money being deposited is a negative number and any money being withdrawn is a positive number.

The reason it works that way is because the FV is assumed to be a distribution. Since that is postive number, the PMT for a distribution has to be positive too.

#3

?

#4

Fixed (i think).

Funny though, I went through level 1 and 2 always putting PMT as a positive number… Only until level 3 dealing with required returns did I realize if PMT and PV are not set up correctly, the calculation may end up being wrong.

#5

The TVM buttons on the calculator are cash flow buttons; cash inflows are positive and cash outflows are negative.

You have two viewpoints from which to choose, and they’re equally valid: the investor or the account. I always tell my Level I candidates to decide, right now, which viewpoint they’re going to adopt, then always use that viewpoint.

If you choose the investor’s viewpoint, then:

  • PV is negative, as you’re giving money to the account
  • PMT is negative for deposits and positive for withdrawals
  • FV is positive, as you’re receiving money from the account

If you choose the account’s viewpoint, then:

  • PV is positive, as you’re receiving money from the investor
  • PMT is positive for deposits and negative for withdrawals
  • FV is negative, as you’re giving money to the investor
#6

While we are on the subject. Do we need to write down our inputs e.g :

if asked to solve the irr to achieve a set amount after 20 years,

Will i need to write :

n=120

FV= 2 000 000

PV= 750 000

* Using a BAii plus calculaotor

Therefore irr=7.68

#7

I would assume this part is not necessary. Unless you are super human brain, its assumed you used the calculaotor (sic)

#8

It turns out that you’re completely wrong and DK is correct: in fact, not only do you need to write down the inputs, but, as he correctly demonstrated, you need to specify the model of calculator that you use.

Failure to do either results in zero marks.

#9

#10

They’re not going to let you write the exam in crayon too FYI