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  • For FM students: tips and tricks to succeed

    Hi,

    I was asked recently what materials and whatnot I used to prepare for FM. I thought my reply would be useful for those preparing for FM in the future. Please add your 'tips and tricks' and any advice you may have. Take it with a grain of salt, & good luck!

    ~~~~~~~~

    I used the ACTEX manual almost exclusively. I did not purchase an interest theory book. I did purchase the Derivative Markets book, but I did not reference it much. You could probably get by without it, but it depends on your familiarity with derivatives. The ACTEX was good: quick and clean.

    I also used MS excel to generate graphs for the different spreads and stuff, so I had a more intuitive understanding of payout functions. This was something I felt would help me really know how derivatives work without having to think about it too much.

    I developed good calculator habits. I use a BA II Plus Professional, and I make good use of the memory registers. You can figure out a way you like yourself, but I'll give you an example of how I use them.

    To calculate an annuity (one of the most basic but step-intensive procedures; you'll do a lot of this) I would use the calculator like this:

    enter the interest rate in mem(1)
    add 1, and hit the 1/x buttor, then sto it in mem(2)
    hit the y^x button followed by the number of periods and sto the result in (3)
    hit the +/- button and add 1, then divide by mem(1)

    sto(4) this is the annuity-immediate value
    if you need an annuity-due, divide by mem(2)

    there are other annuities that you can easily compute from here. This habit pattern allows you to blaze through computations. I would practice the method until I could do it within 20 or 15 seconds. You can also apply similar methods to MFE when you do binomial trees and black-scholes. The calculator is your friend!!

    In fact, I used the calculator so much during the actual exam, it felt like cheating. If you know how to use it, you can do a lot of difficult problems easily. You can figure out loan and interest rate problems iteratively--meaning, just plug in the answers given in the exam, and you usually are trying to solve something so that the NPV = 0, so you can adjust your input (i.e. the exam answer choice) based on the result of the iterative process. Get very familiar with your calculator. Of course, do not rely on it; you must know how to solve the problems directly. Frequently SOA/CAS will make sure you can do this.

    I made myself a 'boldface' (pilot slang for emergency procedures you need to have memorized so you can recall them during a crisis) that had a list of the names of all of the formulas that I felt is was vital to know. I printed this out on computer and I would fill it out without reference to the actual formulas.

    Last word of advice is time yourself doing the problems as you go through--because SOA/CAS will!

    Good luck to everyone.

  • #2
    The financial calculator does feel like cheating. It is allowed, though, so do get the financial calculator.

    I took FM with both a scientific and a financial calculator (I used both TI 30X IIS and TI BA Plus) because I was just too addicted to the two line display of the scientific calculator. The financial one was the one that I used to compute annuities, bond prices and stuff quickly. It's very easy.

    Originally posted by Hawgdriver View Post
    To calculate an annuity (one of the most basic but step-intensive procedures; you'll do a lot of this) I would use the calculator like this:

    enter the interest rate in mem(1)
    add 1, and hit the 1/x buttor, then sto it in mem(2)
    hit the y^x button followed by the number of periods and sto the result in (3)
    hit the +/- button and add 1, then divide by mem(1)

    sto(4) this is the annuity-immediate value
    if you need an annuity-due, divide by mem(2)
    There is a much easier (and safer, less clicks, less prone to error) way to do that. Use the Time Value of Money "worksheet" of the calculator. Read the notes of S. Broverman on how to use it, he explains it well. You will benefit a lot from knowing that calculator, because there are some calculations that CANNOT be done by hand (for example, there is no explicit formula for the interest rate of an annuity given it's present value, number of periods and payment if the number of periods is a large number, that is more than 5... and you don't want to see the formula for n = 4 either). There is a unique solution and it is an algebraic number (obviously), but there is no explicit solution (it's implicit). The calculator finds it by iterating through approximations and finding the best one.

    So, my advice? Get a financial calculator. Although the questions that ask for the interest rate might not be many, you would have much more peace of mind if you know you have all the tools you can use.

    Also, remember, when they clear the memory of the calculator, they reset the calculator to it's factory settings. That means:
    - It will show only two digits after the decimal point
    - It will operate in "Chain" mode, not in algebraic operating system

    Know how to change these settings back to what you need them to be. There was a poor guy on the desk next to mine, who had his calculator reset and couldn't use it during the whole exam!

    Good luck to all
    --J

    Comment


    • #3
      Originally posted by jerry View Post
      There is a much easier (and safer, less clicks, less prone to error) way to do that. Use the Time Value of Money "worksheet" of the calculator. Read the notes of S. Broverman on how to use it, he explains it well.
      The TVM register is great to find a/angle n. You might want to consider some of the benefits of using the registers. When you want to find annuity-due or annuity-increasing/decreasing, or use recursive discounting, you have all of those keys available (i is in 1, v is in 2, v^n is in 3, a/angle n is in 4). Quite often problems require the use of these values more than once. For those reasons I recommend it. I always use mem(3) as my v^n register. The most important thing is that you develop the habit through a decision and stick with it as you do a lot of problems.

      But actually I wish I would have heard Broverman's tips. Any way you look at it, proper use of the calculator is a great boon. Thanks, jerry.

      Comment


      • #4
        what's the difference between BA plus II and professional version? is it going to be more efficient using BA II professional?

        Comment


        • #5
          mport,

          The TI BA II plus is enough for the FM exam. I don't know about whether I would need the pro one for the rest of the exams, but frankly, I am not sure I am going to be an actuary. They cost the same (2 dollars difference), though, so, well...

          Apparently the professional version can compute modified duration. I don't know how efficient and for what instruments it does it, but that does sound nice, doesn't it. Here's what Amazon sais about it:

          Amazon.com Product Description (Professional version)
          Based on the enormously popular (well, in financial circles) BA II Plus Advanced Financial Calculator, the BA II Plus Professional adds functions for Net Future Value (NFV), Modified Internal Rate of Return (MIRR), Modified Duration, Payback, and Discount Payback. Aesthetic touch-ups include a brushed metal exterior, easier to read display, a more comfortable "firm-touch" keypad, and no-slide rubber feet.

          Though it takes a little effort to master the collection of financial worksheets available on the BA II Plus Professional, you'll be glad you invested the time and money in this fine financial calculator. It operates in standard calculator and worksheet modes. The standard mode lets you perform common math as well as operations involving the time value of money--that is, applications such as mortgages or annuities in which payments are equal and evenly spaced. You can also perform trigonometric functions in standard mode.

          The more hard-core worksheet mode includes tables for amortization, bond, depreciation, and compound interest. If you're not familiar with such calculations, the very helpful user's manual will guide you through the process. All previous worksheet values are stored in memory, so you don't have to retype all the bond maturity or cash flow analysis figures.

          The average user who wants to calculate a basic loan payment will be more comfortable working in the standard calculator mode. You can learn to calculate basic interest and payment periods within minutes, and more advanced features are available for those who require heavy-duty financial computing.

          I think the modified duration capability is the most notable difference (from what I am reading about it and from knowing that the Plus can do almost all of these things, except Duration calcs)

          Comment


          • #6
            Originally posted by jerry View Post
            mport,

            The TI BA II plus is enough for the FM exam. I don't know about whether I would need the pro one for the rest of the exams, but frankly, I am not sure I am going to be an actuary. They cost the same (2 dollars difference), though, so, well...

            Apparently the professional version can compute modified duration. I don't know how efficient and for what instruments it does it, but that does sound nice, doesn't it. Here's what Amazon sais about it:

            Amazon.com Product Description (Professional version)
            Based on the enormously popular (well, in financial circles) BA II Plus Advanced Financial Calculator, the BA II Plus Professional adds functions for Net Future Value (NFV), Modified Internal Rate of Return (MIRR), Modified Duration, Payback, and Discount Payback. Aesthetic touch-ups include a brushed metal exterior, easier to read display, a more comfortable "firm-touch" keypad, and no-slide rubber feet.

            Though it takes a little effort to master the collection of financial worksheets available on the BA II Plus Professional, you'll be glad you invested the time and money in this fine financial calculator. It operates in standard calculator and worksheet modes. The standard mode lets you perform common math as well as operations involving the time value of money--that is, applications such as mortgages or annuities in which payments are equal and evenly spaced. You can also perform trigonometric functions in standard mode.

            The more hard-core worksheet mode includes tables for amortization, bond, depreciation, and compound interest. If you're not familiar with such calculations, the very helpful user's manual will guide you through the process. All previous worksheet values are stored in memory, so you don't have to retype all the bond maturity or cash flow analysis figures.

            The average user who wants to calculate a basic loan payment will be more comfortable working in the standard calculator mode. You can learn to calculate basic interest and payment periods within minutes, and more advanced features are available for those who require heavy-duty financial computing.

            I think the modified duration capability is the most notable difference (from what I am reading about it and from knowing that the Plus can do almost all of these things, except Duration calcs)
            Something else to think about is that if you have not taken a corporate finance and investments class, you will need to do this for VEE. This calculator will also be useful for those classes. You certainly don't need it, but it's nice. I would not repurchase the calculator if you already own the BA II Plus.

            Comment


            • #7
              I always used the CF spreadsheets on my BA II Plus to calculate duration instead of using the (Ia)n_i /a_n_i formula.

              To do this:
              1) If this is an annuity, enter C0 as 0.
              2) Then go down the line entering the payments. Do not change the frequency even if this is a level annuity.
              3) Use NPV with the given interest rate to find the present value.

              Now the spiffy part...

              4) Just go through the CF worksheet and multiply each payment by its C value while in the worksheet.

              For instance if its C01, then its the payment x1, if its c03, then its payment x3.. and so on.

              5) Now, just go to NPV and compute it again. You've just found the numerator tv^tRt.

              6) Divide this by the PV and voila.

              It seems longer, but once you do it a few times you can really blaze.

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