Uneven CF and semi-annually compounding

CFA Level I Quant
#1

Hi all,

I would like to solve a practice problem with semi-annually compounding.
Is there a way to solve it with the calculator?

I just inserted the payments in “CF”.
If I enter the “NPV” menu, I can just enter an interest rate.

Is there any possibility ?

And a second question: Isn’t it possible to enter more than 4 CFs in “CF”?

Many thanks

#2

The CF worksheet is set up to handle uneven cash flows. You enter CF0 for the cash flow at time 0 and then enter C01 (the $ amount) that occurs F01 times. According to the BA II manual, you can enter up to 24 distinct cash flows.

If the cash flows all happen semi-annually, then the interest rate you use to calculated NPV is just nominal/2. Things get interesting if your cash flows are NOT semi-annual: you can still enter the cash flows according to the C0x logic above, but you will have to calculate the equivalent interest rate to use.

Simple example (using the BA II):

Cash flows of 10 and 20 at 6 months and 1 year, respectively; interest rate is 7% compounded semi-annually

CF
2nd CLR Work
C01 10 Enter F01 1 Enter C01 20 Enter F02 1 Enter
2nd QUIT
NPV
I 3.5 Enter CPT NPV 28.33204976

#3

Thanks.
Sorry due to my bad english skills, I maybe didn’t explain my problem correctly.

Let’s assume the payments in your example are made at year end
but the 7% are compounded semi-annually.

How get I solve this with the calculator?

Do i just enter the following:

CFo = 0
C01 = 0
C02 = 10
C03 = 0
C04 = 20

and the interest rate would be 3.5% as it is compounded semi-annually?

#4

Yes, you would use 3.5% with the cash flows as you have set them up. :+1:

Another way that would work is to use CF0=0 C01 = 10 F01=1 C02=20 F02=1 and I = 7.1225%: you would then have matched the payment frequency to the compounding frequency (7.1225% compounded annually is equivalent to 7% compounded semi-annually). You should get the exact same answer as using the semi-annual CFs discounted at 3.5% on a semi-annual basis.

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