Exam FM

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INTERESTINTEREST
MEASUREMENT
MEASUREMENT Perpetuity YIELD RATES YIELD RATES
Effective Rate of Interest • Perpetuity-immediate:
1 Two methods for comparing investments:
𝐴𝐴(𝑡𝑡) − 𝐴𝐴(𝑡𝑡 − 1) 𝑃𝑃𝑃𝑃 = 𝑎𝑎N| = 𝑣𝑣 + 𝑣𝑣 ; + ⋯ =
𝑖𝑖" = • Net Present Value (NPV): Sum the present value
𝐴𝐴(𝑡𝑡 − 1) 𝑖𝑖
• Perpetuity-due: of cash inflows and cash outflows. Choose
Effective Rate of Discount 1 investment with greatest positive NPV.
𝐴𝐴(𝑡𝑡) − 𝐴𝐴(𝑡𝑡 − 1) 𝑃𝑃𝑃𝑃 = 𝑎𝑎̈ ∞| = 1 + 𝑣𝑣 + 𝑣𝑣 ; + ⋯ = • Internal Rate of Return (IRR): The rate such that
𝑑𝑑" = 𝑑𝑑
𝐴𝐴(𝑡𝑡) 𝑎𝑎̈ N| = 1 + 𝑎𝑎N| the present value of cash inflows is equal to the
Accumulation Function and Amount Function present value of cash outflows. Choose
𝐴𝐴(𝑡𝑡) = 𝐴𝐴(0) ∙ 𝑎𝑎(𝑡𝑡) investment with greatest IRR.
All-in-One Relationship Formula MORE GENERAL
MORE ANNUITIES
GENERAL ANNUITIES
0" 30"
𝑖𝑖 (0) 𝑑𝑑 (0)
(1 + 𝑖𝑖)" = /1 + 2 = (1 − 𝑑𝑑)3" = /1 − 2 = 𝑒𝑒 5" j-effective method is used when payments are more LOAN AMORTIZATION
𝑚𝑚 𝑚𝑚 LOAN AMORTIZATION
or less frequent than the interest period.
Simple Interest Outstanding Balance Calculation
𝑎𝑎(𝑡𝑡) = 1 + 𝑖𝑖𝑖𝑖 “j-effective” Method • Prospective: 𝐵𝐵" = 𝑅𝑅𝑎𝑎G3"| , 𝑅𝑅 = level payments
Convert the given interest rate to the equivalent
Variable Force of Interest Present value of future payments.
𝑎𝑎7 (𝑡𝑡) effective interest rate for the period between
• Retrospective: 𝐵𝐵" = 𝐿𝐿(1 + 𝑖𝑖) " − 𝑅𝑅𝑠𝑠"|
𝛿𝛿" = each payment.
𝑎𝑎(𝑡𝑡) Accumulated value of original loan amount L
Accumulate 1 from time 𝑡𝑡8 𝑡𝑡𝑡𝑡 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑡𝑡;: Example: To find the present value of 𝑛𝑛 monthly
"C payments given annual effective rate of i, define 𝑗𝑗 minus accumulated value of all past payments.
𝐴𝐴𝐴𝐴 = exp /@ 𝛿𝛿A 𝑑𝑑𝑑𝑑 2 as the monthly effective rate where
"D Retrospective Prospective
𝑗𝑗 = (1 + 𝑖𝑖) 8⁄8; − 1. Then apply 𝑃𝑃𝑃𝑃 = 𝑎𝑎G| using j.
Discount Factor Accumulating Discounting
1 Past Payments Future Payments
𝑣𝑣 = = 1 − 𝑑𝑑 Payments in Arithmetic Progression
Bt
1 + 𝑖𝑖 • PV of n-year annuity-immediate with payments of
𝑖𝑖
𝑑𝑑 = = 𝑖𝑖𝑖𝑖 𝑃𝑃, 𝑃𝑃 + 𝑄𝑄, 𝑃𝑃 + 2𝑄𝑄, … , 𝑃𝑃 + (𝑛𝑛 − 1)𝑄𝑄
1 + 𝑖𝑖 𝑎𝑎G| G
VVV − 𝑛𝑛𝑣𝑣
𝑃𝑃𝑃𝑃 = 𝑃𝑃𝑎𝑎G| + 𝑄𝑄 0 n
𝑖𝑖 t
Calculator-friendly version: L
ANNUITIES ANNUITIES
𝑄𝑄 𝑄𝑄𝑄𝑄 G
Annuity-Immediate 𝑃𝑃𝑃𝑃 = W𝑃𝑃 + X 𝑎𝑎G| VVV + W− X 𝑣𝑣
𝑖𝑖 𝑖𝑖 Loan Amortization
1 − 𝑣𝑣 G 𝑄𝑄 𝑄𝑄𝑄𝑄
𝑃𝑃𝑃𝑃 = 𝑎𝑎G| = 𝑣𝑣 + 𝑣𝑣 ; + ⋯ + 𝑣𝑣 G = 𝑁𝑁 = 𝑛𝑛, 𝐼𝐼 ⁄𝑌𝑌 = 𝑖𝑖 (in %), 𝑃𝑃𝑃𝑃𝑃𝑃 = 𝑃𝑃 + , 𝐹𝐹𝐹𝐹 = − For a loan of 𝑎𝑎G| repaid with n payments of 1:
𝑖𝑖 𝑖𝑖 𝑖𝑖
𝐴𝐴𝐴𝐴 = 𝑠𝑠G| = 1 + (1 + 𝑖𝑖) + ⋯ + (1 + 𝑖𝑖)G38 Period 𝑡𝑡
(1 + 𝑖𝑖)G − 1 • PV of n-year annuity-immediate with payments of
Interest (𝐼𝐼" ) 1 − 𝑣𝑣 G3"L8
= 1, 2, 3, … , 𝑛𝑛
𝑖𝑖
k̈ l| 3Gm l
Principal repaid (𝑃𝑃" ) 𝑣𝑣 G3"L8
Unit increasing: (𝐼𝐼𝐼𝐼)G| =
a s n
Total 1
n n P&Q version: 𝑃𝑃 = 1, 𝑄𝑄 = 1, 𝑁𝑁 = 𝑛𝑛
$1 1 … 1 1 General Formulas for Amortized Loan with
• PV of n-year annuity-immediate with payments of
Level/Non-Level Payments
1 2 … n–1 n 𝑛𝑛, 𝑛𝑛 − 1, 𝑛𝑛 − 2, … , 1
G3kl| 𝐼𝐼" = 𝑖𝑖 ⋅ 𝐵𝐵"38
Unit decreasing: (𝐷𝐷𝐷𝐷)G| = 𝐵𝐵" = 𝐵𝐵"38(1 + 𝑖𝑖) − 𝑅𝑅" = 𝐵𝐵"38 − 𝑃𝑃"
n
Annuity-Due P&Q version: 𝑃𝑃 = 𝑛𝑛, 𝑄𝑄 = −1, 𝑁𝑁 = 𝑛𝑛 𝑃𝑃" = 𝑅𝑅" − 𝐼𝐼"
1 − 𝑣𝑣 G
𝑃𝑃𝑃𝑃 = 𝑎𝑎̈ G| = 1 + 𝑣𝑣 + 𝑣𝑣 ; + ⋯ + 𝑣𝑣 G38 = 𝑃𝑃"L} = 𝑃𝑃" (1 + 𝑖𝑖)} (only for Level Payments)
𝑑𝑑 • PV of perpetuity-immediate and perpetuity-due
𝐴𝐴𝐴𝐴 = 𝑠𝑠̈ G| = (1 + 𝑖𝑖) + (1 + 𝑖𝑖) ; + ⋯ + (1 + 𝑖𝑖)G with payments of 1, 2, 3, …
(1 + 𝑖𝑖)G − 1 1 1 1 1
= (𝐼𝐼𝐼𝐼)N| = = + ; (𝐼𝐼𝑎𝑎̈ )N| = ;
𝑑𝑑 𝑖𝑖𝑖𝑖 𝑖𝑖 𝑖𝑖 𝑑𝑑

a!! s
!! Payments in Geometric Progression
n n PV of an n-year annuity-immediate with payments
$1 1 1 … 1 of 1, (1 + 𝑘𝑘), (1 + 𝑘𝑘); , … , (1 + 𝑘𝑘)G38
1 + 𝑘𝑘 G
1 2 … n–1 n 1−q r
1 + 𝑖𝑖 , 𝑖𝑖 ≠ 𝑘𝑘
𝑃𝑃𝑃𝑃 =
𝑖𝑖 − 𝑘𝑘
Immediate vs. Due Level and Increasing Continuous Annuity
𝑎𝑎̈ G| = 𝑎𝑎G|(1 + 𝑖𝑖) = 1 + 𝑎𝑎G38| G 1 − 𝑣𝑣 G 𝑖𝑖
𝑠𝑠̈ G| = 𝑠𝑠G| (1 + 𝑖𝑖) = 𝑠𝑠GL8| − 1 𝑎𝑎VG| = @ 𝑣𝑣 " 𝑑𝑑𝑑𝑑 = = 𝑎𝑎G|
t 𝛿𝛿 𝛿𝛿
Deferred Annuity G 𝑎𝑎VG| − 𝑛𝑛𝑣𝑣 G
̅ V)G| = @ 𝑡𝑡𝑡𝑡 " 𝑑𝑑𝑑𝑑 =
(𝐼𝐼 𝑎𝑎
m-year deferred n-year annuity-immediate: t 𝛿𝛿
𝑃𝑃𝑃𝑃 = 0|𝑎𝑎G| = 𝑣𝑣 0 ⋅ 𝑎𝑎G| = 𝑎𝑎0LG| − 𝑎𝑎0|

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BONDS BONDS SPOT RATESRATES
SPOT AND FORWARD RATES
AND FORWARD RATES DETERMINANTS OF INTEREST
DETERMINANTS RATES
OF INTEREST RATES
Bond Pricing Formulas 𝑠𝑠" is the t-year spot rate • Interest rate can be viewed as the equilibrium
𝑃𝑃 Price of bond 𝑓𝑓["D,"C] is the forward rate from time 𝑡𝑡8 to time 𝑡𝑡;, price of money.
𝐹𝐹 Par value (face amount) of bond expressed annually. • Interest rate can be decomposed into five
(not a cash flow) 0 components:
(1 + 𝑠𝑠G )G ⋅ ã1 + 𝑓𝑓[G,GL0] å = (1 + 𝑠𝑠GL0 )GL0
𝑟𝑟 Coupon rate per payment period o Real risk-free rate (𝑟𝑟)
𝐹𝐹𝐹𝐹 Amount of each coupon payment o Maturity risk premium
(1+sn+m)n+m
𝐶𝐶 Redemption value of bond o Default risk premium (𝑠𝑠)
(𝐹𝐹 = 𝐶𝐶 unless otherwise stated) o Inflation premium (𝑖𝑖ë , 𝑖𝑖A , 𝑐𝑐, 𝑖𝑖k )
𝑖𝑖 Interest rate per payment period 0 n n+m o Liquidity premium
𝑛𝑛 Number of coupon payments • 𝑅𝑅 = 𝑟𝑟 + 𝑠𝑠 + 𝑖𝑖ë + 𝑖𝑖A − 𝑐𝑐 + 𝑖𝑖k
Basic Formula (1+sn)n (1+f[n,n+m])m o For loans with inflation protection, set 𝑖𝑖ë =
𝑃𝑃 = 𝐹𝐹𝐹𝐹𝑎𝑎G|n + 𝐶𝐶𝑣𝑣 G 𝑖𝑖A = 0. Then, 𝑅𝑅 is the real interest rate.
Premium/Discount Formula: (1 + 𝑠𝑠G )G = ã1 + 𝑓𝑓[t,8] å ⋅ ã1 + 𝑓𝑓[8,;] å ⋯ ã1 + 𝑓𝑓[G38,G] å o For loans without inflation protection, set
𝑃𝑃 = 𝐶𝐶 + (𝐹𝐹𝐹𝐹 − 𝐶𝐶𝐶𝐶)𝑎𝑎G|n 𝑖𝑖k = 𝑐𝑐 = 0. Then, 𝑅𝑅 is the nominal interest
(1+sn)n rate.
Premium vs. Discount • Four theories explaining why interest rates
Premium Discount differ by terms:
𝑃𝑃 > 𝐶𝐶 𝑃𝑃 < 𝐶𝐶 0 1 2 … n–1 n o Market segmentation theory
Condition or or o Preferred habitat theory
(1+f[0,1]) (1+f[1,2]) … (1+f[n–1,n]) o Liquidity preference theory/Opportunity cost
𝐹𝐹𝐹𝐹 > 𝐶𝐶𝐶𝐶 𝐹𝐹𝐹𝐹 < 𝐶𝐶𝐶𝐶
Amortization theory
Write-Down Write-Up o Expectations theory
Process
INTEREST RATE SWAP • Federal Reserve facilitates a country’s payment
|(𝐹𝐹𝐹𝐹 − 𝐶𝐶𝐶𝐶) ⋅ 𝑣𝑣 G3"L8 | INTEREST RATE SWAP
Amount operations and functions as a last resort lender
= |𝐵𝐵"38 − 𝐵𝐵" | = |𝐹𝐹𝐹𝐹 − 𝐼𝐼" |
An agreement between two parties in which both to commercial banks.
General Formulas for Bond Amortization parties agree to exchange a series of cash flows • U.S. T-bills are quoted:
• Book value: based on interest rates. 360 𝐼𝐼
𝐵𝐵" = 𝐹𝐹𝐹𝐹𝑎𝑎G3"|n + 𝐶𝐶𝑣𝑣 G3" = 𝐶𝐶 + (𝐹𝐹𝐹𝐹 − 𝐶𝐶𝐶𝐶)𝑎𝑎G3"|n Quoted Rate = ×
Swap Rate 𝑁𝑁 𝐶𝐶
• Interest earned = 𝑖𝑖𝐵𝐵"38 • Canadian T-bills are quoted:
The swap rate can be calculated by equating the
365 𝐼𝐼
Callable Bonds present value of swap payments with the present Quoted Rate = ×
𝑁𝑁 𝑃𝑃
Calculate the lowest price for all possible value of expected variable payments. where N is the number of days to maturity, I is the
redemption dates at a certain yield rate. This is the • If notional amount is not level: amount of interest, C is the maturity value and P is
highest price that guarantees this yield rate. 𝑋𝑋8 𝑅𝑅 𝑋𝑋; 𝑅𝑅 𝑋𝑋é 𝑅𝑅
+ +
1 + 𝑠𝑠8 (1 + 𝑠𝑠; ); (1 + 𝑠𝑠é )é
the price.
• Premium bond – call the bond on the FIRST 𝑋𝑋8 𝑓𝑓[t,8] 𝑋𝑋; 𝑓𝑓[8,;] 𝑋𝑋é 𝑓𝑓[;,é]
possible date. = + +
1 + 𝑠𝑠8 (1 + 𝑠𝑠; ); (1 + 𝑠𝑠é )é
• Discount bond – call the bond on the LAST • If notional amount is level: INTEREST MEASUREMENT
INTEREST OF A FUNDOF A FUND
MEASUREMENT
possible date. Since an interest rate swap is equivalent to
borrowing at a floating rate to buy a fixed-rate Dollar-weighted Interest Rate
bond, fixed swap rate is the coupon rate on a par The yield rate computation depends on the amount
STOCKS STOCKS coupon bond. invested.
𝑅𝑅 𝑅𝑅 𝑅𝑅 + 1 Method:
Price of Level Dividend-Paying Stock + +⋯+ =1 • Calculate amount of interest: 𝐼𝐼 = 𝐵𝐵 − 𝐴𝐴 − 𝐶𝐶
𝐹𝐹𝐹𝐹 1 + 𝑠𝑠8 (1 + 𝑠𝑠; ); (1 + 𝑠𝑠G )G
𝑃𝑃 = 1 − 𝑃𝑃G 𝐴𝐴: Amount at the beginning of period
𝑖𝑖 𝑅𝑅 = 𝐵𝐵: Amount at the end of period
𝐹𝐹 = par value, 𝑟𝑟 = fixed dividend rate 𝑃𝑃8 + 𝑃𝑃; + ⋯ + 𝑃𝑃G
𝐶𝐶: Deposit/withdrawal
Price of Increasing Dividend-Paying Stock Net Swap Payment • Calculate the dollar-weighted interest rate:
𝐷𝐷 The difference between the fixed interest payment 𝐼𝐼
𝑃𝑃 = and variable interest payment. 𝑖𝑖úù =
𝑖𝑖 − 𝑘𝑘 𝐴𝐴 + ∑ 𝐶𝐶" (1 − 𝑡𝑡)
𝐷𝐷 = expected first dividend, 𝑘𝑘 = growth rate
Net Interest Payment Time-weighted Interest Rate
The combination of the net swap payment and the The yield rate computation depends on successive
interest payment made by the borrower to the sub-intervals of the year each time a deposit or
lender. withdrawal is made.
Deferred Interest Rate Swap Method:
For an 𝑥𝑥-year deferred (𝑛𝑛 − 𝑥𝑥)-year swap with level 𝐴𝐴; 𝐴𝐴é 𝐴𝐴† 𝐴𝐴G
1 + 𝑖𝑖üù = W X ⋅ W X ⋅ W X ⋅ … ⋅ W X
notional amount: 𝐵𝐵8 𝐵𝐵; 𝐵𝐵é 𝐵𝐵G38
𝑃𝑃ê − 𝑃𝑃G Date 1 Date 2
𝑅𝑅 =
𝑃𝑃êL8 + 𝑃𝑃êL; + ⋯ + 𝑃𝑃G Account
where 𝑥𝑥 is the number of deferred years and 𝑛𝑛 is 𝐴𝐴8 𝐴𝐴;
Before CF
the term of the swap. Cash Flow
𝐶𝐶8 𝐶𝐶;
Market Value of a Swap (CF)
• The market value of a swap at time t is the Account
𝐵𝐵8 = 𝐴𝐴8 + 𝐶𝐶8 𝐵𝐵; = 𝐴𝐴; + 𝐶𝐶;
present value at time t of its expected future After CF
cash flows.
• The market value of a swap is 0 at inception.

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DURATION AND CONVEXITY
DURATION AND CONVEXITY IMMUNIZATION IMMUNIZATION BA-II PLUSPLUS
BA-II CALCULATOR GUIDELINE GUIDELINE
CALCULATOR
Duration Redington and Full Immunization Basic Operations
𝑃𝑃7 (𝛿𝛿) ∑G"°t 𝑡𝑡 ⋅ 𝑣𝑣 " ⋅ 𝐶𝐶𝐶𝐶" ENTER (SET) : Send value to a variable (option)
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = − = Redington Full
𝑃𝑃(𝛿𝛿) ∑G"°t 𝑣𝑣 " ⋅ 𝐶𝐶𝐶𝐶"
↑ ↓ : Navigate through variables
7 (𝑖𝑖) ∑"°t 𝑡𝑡 ⋅ 𝑣𝑣 "L8 ⋅ 𝐶𝐶𝐶𝐶"
G
𝑃𝑃 𝑃𝑃𝑉𝑉ß®®ë"® = 𝑃𝑃𝑉𝑉©nk™n´n"në®
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = − = 2ND : Access secondary functions (yellow)
𝑃𝑃(𝑖𝑖) ∑G"°t 𝑣𝑣 " ⋅ 𝐶𝐶𝐶𝐶"
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀ß = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀© or 𝑃𝑃ß7 = 𝑃𝑃©7 STO + 0~9 : Send on-screen value into memory
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 ⋅ 𝑣𝑣
There has to be asset RCL + 0~9 : Recall value from a memory
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀(𝑛𝑛-year zero-coupon bond) = 𝑛𝑛 𝐶𝐶ß > 𝐶𝐶©
cash flows before and
1 + 𝑖𝑖 or Time Value of Money (TVM)
𝑀𝑀𝑎𝑎𝑎𝑎𝑎𝑎 (geometrically increasing perpetuity) = after each liability
𝑖𝑖 − 𝑘𝑘 𝑃𝑃ß77 > 𝑃𝑃©77 Good for handling annuities, loans and bonds.
cash flow.
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀(𝑛𝑛-year par bond) = 𝑎𝑎̈ G| Note: Be careful with signs of cash flows.
Immunizes against Immunizes against
First-order Modified Approximation small changes in 𝑖𝑖 any changes in 𝑖𝑖 N : Number of periods
𝑃𝑃(𝑖𝑖G ) ≈ 𝑃𝑃(𝑖𝑖£ ) ⋅ [1 − (𝑖𝑖G − 𝑖𝑖£ )(𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀)] I/Y : Effective interest rate per period (in %)
Immunization Shortcut
(works for immunization questions that have asset PV : Present value
First-order Macaulay Approximation
cash flows before and after the liability cash flow) PMT : Amount of each payment of an annuity
1 + 𝑖𝑖£ §k•ú
𝑃𝑃(𝑖𝑖G ) ≈ 𝑃𝑃(𝑖𝑖£ ) ⋅ W X FV : Future value
1 + 𝑖𝑖G 1. Identify the asset allocation at the time the
CPT + (one of above): Solve for unknown
Passage of Time liability occurs by equating face amounts
(prices) and durations. 2ND + BGN , 2ND + SET , 2ND + QUIT :
Given that the future cash flows are the same at
Switch between annuity immediate and annuity
time 𝑡𝑡8 and time 𝑡𝑡;: 𝑡𝑡8 Shorter bond duration
𝑀𝑀𝑀𝑀𝑀𝑀𝐷𝐷"C = 𝑀𝑀𝑀𝑀𝑀𝑀𝐷𝐷"D − (𝑡𝑡; − 𝑡𝑡8 ) due
𝑡𝑡; Longer bond duration
𝑀𝑀𝑀𝑀𝑀𝑀𝐷𝐷"C = 𝑀𝑀𝑀𝑀𝑀𝑀𝐷𝐷"D − 𝑣𝑣(𝑡𝑡; − 𝑡𝑡8) 2ND + P/Y : Please keep P/Y and C/Y as 1
𝑡𝑡© Liability duration
𝑤𝑤 Shorter bond's weight 2ND + CLR TVM : Clear TVM worksheet
Duration of a portfolio 2ND + AMORT : Amortization (See Below)
1 − 𝑤𝑤 Longer bond's weight
For a portfolio of m securities where invested
amount 𝑃𝑃 = 𝑃𝑃8 + 𝑃𝑃; + ⋯ + 𝑃𝑃0 at time 0, 𝑡𝑡; − 𝑡𝑡© For bonds ( 𝑃𝑃 = 𝐹𝐹𝐹𝐹𝑎𝑎G|n + 𝐶𝐶𝑣𝑣 G ):
𝑤𝑤 =
𝑃𝑃8 𝑃𝑃; 𝑃𝑃0 𝑡𝑡; − 𝑡𝑡8 N = 𝑛𝑛; I/Y = 𝑖𝑖; PV = −𝑃𝑃; PMT = 𝐹𝐹𝐹𝐹; FV = 𝐶𝐶.
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀¶ = 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀8 + 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀; + ⋯ + 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀0
𝑃𝑃 𝑃𝑃 𝑃𝑃
2. Adjust for interest to the asset maturity date.
Convexity Cash Flow Worksheet ( CF , NPV , IRR )
𝑃𝑃77 (𝑖𝑖) ∑G"°t 𝑡𝑡 ⋅ (𝑡𝑡 + 1) ⋅ 𝑣𝑣 "L; ⋅ 𝐶𝐶𝐶𝐶" Good for non-level series of payments.
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = = Input ( CF )
𝑃𝑃(𝑖𝑖) ∑G"°t 𝑣𝑣 " ⋅ 𝐶𝐶𝐶𝐶"
𝑃𝑃 77 (𝛿𝛿) ∑"°t 𝑡𝑡 ⋅ 𝑣𝑣 " ⋅ 𝐶𝐶𝐶𝐶"
G ; CF0: Cash flow at time 0
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = =
𝑃𝑃(𝛿𝛿) ∑G"°t 𝑣𝑣 " ⋅ 𝐶𝐶𝐶𝐶" Cn: nth cash flow
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 = 𝑣𝑣 ; (𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 + 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀) Fn: Frequency of the cash flow
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 (𝑛𝑛-year zero-coupon bond) = 𝑛𝑛 ;
Output ( NPV , IRR )
I: Effective interest rate (in %)
NPV + CPT : Solve for net present value
IRR + CPT : Solve for internal rate of return

Amortization Schedule ( 2ND + AMORT )

Good for finding outstanding balance of the loan and
interest/principal portion of certain payments.
Note: BA-II Plus requires computing the unknown
TVM variable before entering into AMORT
function.
P1: Starting period
P2: Ending period
BAL: Remaining balance of the loan after P2
PRN: Sum of the principal repaid from P1 to P2
INT: Sum of the interest paid from P1 to P2

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