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Why is effective duration better than modified duration for bonds with embedded options?
Modified duration assumes the bond's cash flows stay fixed when yield changes. That is the wrong assumption when the option can alter expected maturity or expected payments. Effective duration estimates sensitivity by comparing model prices after an
Do callable and putable bonds reduce duration for the same reason?
They often point to the same broad answer, lower effective duration than a comparable option-free bond, but the mechanics differ. A callable bond gives the issuer the valuable right. When rates fall, the issuer can refinance, so the investor's upside
Why do embedded options usually reduce a bond's duration?
Embedded options can shorten or reshape the expected cash-flow path when rates move. Duration is lower because the bond is not fully exposed to the same rate scenarios as an otherwise identical option-free bond. For a callable bond, falling yields ma
What is the manual workflow for Macaulay duration if CFA gives the cash flows?
Use four columns: time, cash flow, present value of cash flow, and present value weight times time. First discount each cash flow at the yield per period. Second, divide each present value by total bond price to get the weight. Third, multiply each w
When is modified duration enough, and when do I need convexity too?
Modified duration is usually enough when the prompt gives a small yield change and does not provide convexity. It gives the first-order linear estimate. Convexity becomes relevant when the prompt provides convexity, the yield change is large enough f
How do I use modified duration to estimate a bond price change?
Use the decimal yield change. The first-order estimate is: percentage price change approximately equals -modified duration x change in yield If modified duration is 6.4 and yield rises by 25 basis points, the decimal yield change is 0.0025 . The esti
Can I use a calculator shortcut for Macaulay duration if I understand the cash-flow weighting?
Yes, but only if you can explain what the output represents. Macaulay duration is the present-value-weighted average time to receive the bond's promised cash flows. A calculator shortcut is just a faster route to the same timing measure; it is not a
Why do people describe a swap as a series of forward-like cash flows?
A plain-vanilla swap has multiple settlement dates. On each date, the parties compare the fixed leg and floating leg and make a net payment. That is similar to having a sequence of forward commitments on future rates. The notional amount is usually n
Why are forward price and forward value not the same thing?
The forward price is the delivery price agreed to in the contract. The forward value is what the contract is worth today. At initiation, a fairly priced forward often has value near zero because neither party should receive a free benefit. After mark
Before drawing a derivative payoff diagram, what should I identify first?
Identify the contract type and the side of the trade. A long forward, short forward, long call, short call, long put, and short put all have different payoff directions. Then mark the trigger price, such as the forward price or option strike. Finally
What is the fastest way to tell forwards, futures, options, and swaps apart on CFA questions?
Start with rights and obligations. A forward is a customized obligation to transact later. A futures contract is also an obligation, but it is standardized, exchange-traded, and settled daily. An option gives the buyer a right and the seller an oblig
How can I review CFA calculator work if the BA II Plus does not show a full step history?
Build a short written audit trail instead of relying on calculator history. You do not need to write every keystroke. You need to capture the rate format, formula structure, and final sign. For a duration item, a strong audit line might be: duration
How do I convert basis points before using duration or convexity formulas?
Convert basis points into a decimal yield change before multiplying by duration or convexity terms. One basis point is 0.01% , which is 0.0001 in decimal form. So 40 basis points equals 0.40% , or 0.0040 as a decimal. If modified duration is 6.25 , a
When should a CFA rate be entered as 8 rather than 0.08?
Enter 8 when the calculator field expects a percentage rate, such as the BA II Plus I/Y field in a time value of money setup. Enter 0.08 when you are manually using the rate inside an algebraic formula, such as PV = CF / (1 + r) . The difference is n
Should I use the BA II Plus percent key to convert every CFA rate into a decimal?
No. Treat the percent key as context-dependent, not as a universal conversion shortcut. In a displayed formula, it is usually safer to type the decimal directly. For example, use 0.075 when a formula requires r = 7.5% as a decimal rate. In TVM worksh
When should I round intermediate CFA calculation results?
Usually, do not round intermediate results. Keep the calculator's stored precision or write enough decimals to avoid changing the economics of the problem. Round the final answer to match the question. If the stem asks for the nearest dollar, round a
How many decimal places should I display on the BA II Plus for CFA exam work?
Use enough decimal places that you can see whether the number is behaving sensibly. A zero-decimal display is usually too coarse for CFA calculations because it can hide rate, present value, yield, and statistic differences. Many candidates prefer se
Can the BA II Plus show the full formula I am typing during CFA calculations?
Do not rely on the BA II Plus as a full equation display. Treat it as a financial calculator that executes inputs, not as an algebra notebook that preserves a readable expression. The workaround is to write a short formula trace before entering numbe
Why does my BA II Plus look like it is rounding CFA answers to whole numbers?
The likely issue is the display setting, not the underlying calculation. If the calculator is set to show zero decimals, a value such as 1,023.68 may appear as 1,024 . For CFA work, that can be dangerous because many calculations need more precision
How do I convert a quoted annual rate into the rate I should use in a TVM problem?
First match the rate to the cash-flow period. If the cash flows are monthly, use a monthly periodic rate. If you need an annual return measure, convert to an effective annual rate.
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