CFA Video: Two Methods to Compute Mortgage Balance using BAII Plus

Not very good. For starters, to describe a handful of still slides with added spoken commentary as a "video" is rather overhyping things, even allowing for the fact that a virtual laser pointer is being used to flash around on the slides a bit. A proper video would show the dollybird actually pressing keys on the calculator.

Second, and without wishing to appear racially discriminatory, I'd say that to use a non-native speaker in the production of training materials presumably intended for serious use is a mistake. What is this pee-wee function she's on about? :-)

Finally, and I don't know how many people have and regularly use the particular Texas Instruments pocket calculator to which you refer, but if it's necessary to produce a training video to show people how to use its built-in specialist financial functions, then frankly one has to ask whether there's much point in having those functions in a calculator, when it's just as easy and probably more straightforward to use the simple "steam-age" functions which require less by way of an instruction manual, and can be used on any decent scientific calculator.

I expect that even on the "BAII Plus" it'll be easier to use ordinary scientific mode to calculate mortgage payments and balances than it is to use its specialist financial features.

Q: What is the balance on a 30-year 400k loan at 5.5%pa after 2 years?

A: The video correctly gives the first step as converting to a monthly rate. The voiceover gives this rate as 0.458%, but glosses over the fact that the subsequent calculation doesn't actually use 0.00458 but the more exact rate of 0.055/12 or 0.00458333...

It then reasonably takes the next step (which strictly speaking is not necessary) of calculating the monthly payment, which it gives as 2271.

I'll skip their "method 1" of using the amortisation function and move straight to their "method 2" which applies the payment calculation formula backwards to compute what the principal amount would be on a

28 year loan at the same rate for which the monthly payments are 2271.

This is absolutely the right way to do it, but in fact the intermediate calculation of an actual value for P was unnecessary as I show below.

The simple formula is that the monthly payment P for amount A at monthly rate r over n months is equal to A*r/(1-(1+r)^-n), which for A@0k, r=0.055/12 and n60 does indeed give P"71.16.

This formula is easily reversed to give A = P*(1-(1+r)^-n)/r, which for P as computed above, and for the same r but n60-2436 does indeed give A88919.34.

However, you don't actually need to compute P since you can plug the algebraic expression for P from the first formula into the second:

A336 = A360 * (1-f^-336)/(1-f^-360)

(where f=(1+r)) which of course gives the same answer, but a little bit more directly.