12.3 Formula Sheet and Calculator Workflow

Formula Sheet and Calculator Workflow

A formula sheet is a decision tool, not decoration. At Level I, formulas span Quant, FSA, Corporate Issuers, Equity, Fixed Income, Derivatives, Alternatives, and Portfolio Management. A useful sheet answers three things for each entry: what is measured, what inputs are needed, and what answer size is reasonable. Before any of that, fix the hardware - CFA Institute permits only two calculators, the Texas Instruments BA II Plus (including BA II Plus Professional) and the Hewlett-Packard 12C (including HP 12C Platinum). Every keystroke drill below must use the model you will bring.

Organize by function, not by chapter

Put time value of money, annuities, perpetuities, NPV, and IRR in one block. Put return and risk measures in another. Group FSA ratios by profitability, liquidity, solvency, activity, and valuation. Group bond price, yield, duration, convexity, and spread tools together. Then bolt a trigger word onto each entry, because the trigger is what the exam actually gives you.

Calculator discipline

Discipline starts before computation. On the BA II Plus: clear the TVM keys (2ND, CLR TVM) and the cash-flow worksheet (CF, 2ND, CLR WORK), confirm the decimal display (2ND, FORMAT), check payments per year (2ND, P/Y) is set as you expect, and confirm END versus BGN mode (2ND, BGN). For time value of money, give cash outflows and inflows opposite signs - an outflow PV with an inflow FV, or the calculator returns an error or a nonsense result. Match the period count to the periodic rate: monthly payments over 10 years means N = 120 and a monthly rate, not N = 10 and an annual rate.

For uneven cash flows, use the cash-flow worksheet: CF0 is usually the initial investment as a negative number, later flows follow the stem's timing, and the F (frequency) field repeats a recurring amount. Level annuities can stay on the TVM keys. For bonds, separate the quoted annual rate from the periodic rate. A semiannual-pay bond uses half the annual coupon and twice the years - an 8-year bond becomes N = 16, with PMT and I/Y on a semiannual basis.

Reasonableness tests prevent trap answers

Build plain-language direction checks into the sheet: a higher required return lowers a justified price-to-earnings ratio; a higher yield lowers a bond price; longer maturity and lower coupon raise interest-rate sensitivity. If your computed bond price rose after a yield increase, you entered something wrong - that single check catches a large share of calculator slips.

Common trap: an overstuffed sheet hides the formulas that matter. Keep each entry to purpose, trigger, formula, input trap, and reasonableness check, and write only the variant you will actually use under time pressure. During final review, recompute every missed formula item from scratch while saying the workflow aloud - requested output, known inputs, conversions, formula, entry, direction. If you cannot narrate the setup in a minute, the problem is process, not memory.

The rate-conversion drills that catch the most points

More Level I calculation points are lost to rate handling than to any single formula. Three conversions deserve a dedicated corner of the sheet. First, the effective annual rate: a 6% nominal rate compounded monthly is not 6% but (1 + 0.06/12)^12 - 1 = 6.17%. Second, the periodic rate: a 6% annual rate on a semiannual bond is 3% per period, paired with twice the number of years. Third, the stated-versus-real distinction: when an item mentions inflation, decide whether the requested figure is nominal or real before entering anything, because mixing the two is a designed trap.

For the cash-flow worksheet, a clean habit prevents the classic NPV sign error. Enter the initial outlay as a negative CF0, enter each subsequent inflow as a positive amount with its frequency, set I as the periodic discount rate, then compute NPV; for IRR, leave I blank and press the IRR key. If the calculator returns "Error 5," the cash flows never change sign, so re-check that the outflow is negative. Always sanity-check the result: a project with cash inflows far exceeding the outlay should show a clearly positive NPV, and an IRR below the discount rate must pair with a negative NPV.

Anchor formulas worth a permanent slot

Keep these where you can find them under pressure. The future value of an ordinary annuity, the present value of a growing perpetuity (PMT / (r - g)), the bond price as the present value of coupons plus the present value of par, modified duration as Macaulay duration divided by (1 + periodic yield), the coefficient of variation, and the holding-period return. Beside each, write the one input most candidates get wrong - for the growing perpetuity it is forgetting that r and g must share the same periodicity; for modified duration it is using an annual yield where a periodic yield belongs.

A short, accurate, well-triggered sheet beats an exhaustive one you cannot navigate in ninety seconds.