Over the years of training CTP candidates to take the certification examination, I’ve found that there’s a lot of anxiety regarding the calculations. One technique I’ve used to help reduce “calculation anxiety” is to present the calculations in their operational context. This approach answers the two questions regarding any calculation which are; “So what?” and “Who cares?” In other words, why is it important and how does it support day-to-day decision making. I believe that this preparation technique can help you learn how to “crunch” the numbers as well as answer conceptual questions concerning a given calculation.
Here’s an example from the Essentials for Treasury Management, 2nd edition (ETM2) Chapter 10 (or ETM 3rd Ed. Chapter 11) which covers short-term investing. In that chapter, there are the following three annual yield calculations:
- Discount Rate
- Money Market Yield
- Bond Equivalent Yield
The operational context of these calculations is related to the two objectives of short-term investing which are in descending order of priority:
- Don’t lose the money (ie: preserve the principle)
- Try to earn a return (ie: return is secondary)
So, if you’re faced with two competing short-term investment opportunities to place some surplus cash, and both have the same amount of risk, you need to determine which will give you the highest return. This might not be immediately obvious if, for example, one is sold on a discount basis and the other is sold on an interest bearing basis. The operational context in this case, which is driven by the objectives of short-term investing, is that these calculations are used to “level the playing field” between these investment opportunities to help you make an informed decision regarding which has the highest yield.
Additionally if you’re using flash cards as a study technique put the equation on one side of the card and its operational context, once you’ve identified it, on the other side.
- George Schilling, CTP