CTP Exam Tips: Danger in the Decimals

Sep 14, 2016

By Fred Butterfield, CTP

ButterfieldWhen taking the CTP exam, the participant is only permitted the use of the calculator on the computer. In business, the participant can use any calculator or application they choose. The calculators on computers generally display 15 to 17 characters. Other calculators can display up to 20 characters. Excel automatically calculates 15 places after the decimal, even though the display can be limited to any number less than that.

So what difference does it make? Why is this important to know? Simply put, too many decimals can yield the wrong answer.

In the world of business, numbers are usually limited to no more than four positions after the decimal. Any calculation related to money is automatically limited to two positions after the decimal, in most cases, because there is no fraction of a penny. Investment positions often go to four characters. When reviewing or calculating interest factors on investments, those may go out to eight or 10 positions, but they still get rounded off at four characters, because they will ultimately involve money.

There are other examples that can be noted. The important reason for bringing up this point is to note that, regardless of the capability of the calculator or the ‘common ‘ practice you may be familiar with from your responsibilities, when performing calculations for the exam, round to four places after the decimal in your calculations. This is most likely to give you the answer for the question. Once you have passed the exam and received your certification, it is still an important thing to know for verifying external facts. As an example, when comparing the actual interest received from a money market account to the amount estimated by multiplying the daily factor times the balance, there will be differences. It is not unusual for funds to post their daily factors to four decimal places but use the full 12 or 15 decimal places for calculating the actual interest due.

Fred Butterfield is a treasury manager based in Denver.

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