Financial Calculator Guide Please feel free to distribute this document and also please try to avoid printing out such a long document The current version is here Comments or corrections should be sent to Larry Schrenk Table of Contents Chapter 1 Single Dollar Problems Future Value and Present Value p Future Value Problems Present Value Problems Resetting your Calculator Chapter 2 Single Dollar Problems Interest Rate and Time p Interest Rate Problems Time Problems Why Enter Negative Values optional Chapter 3 Annuities Future Value and Present Value p Future Value Annuity Problems Present Value Annuity Problems Chapter 4 Annuities Interest Rate Time and Payment p Interest Rate Annuity Problems Time Annuity Problems Payment Annuity Problems Time Value of Money Decision Flowchart p Error Reference source not found Chapter 5 Non Annual Compounding and Discounting p Chapter 6 Accounting for Inflation Real versus Nominal Rates p The Effects of Inflation Inflation Adjusted Saving Alternate Method optional Appendix Other Calculators p Hewlett Packard 10bII TI 83 84 CALCULATOR REQUIREMENTS You will need a calculator with financial for most finance classes If you already have a TI 83 or 84 calculator that will do nicely If not you will need to buy a calculator Unfortunately basic scientific calculators normally do 2 8 11 16 21 23 26 functions graphing financial not have 1 13 19 Financial Calculator Guide 2 financial functions If in doubt contact me Do not spend a lot of money on a fancy model A basic financial calculator should cost 30 40 at many department stores maybe cheaper if you can get it online or used A financial calculator has many financial functions so you won t need to memorize a lot of formulae for the exams The most common models are the Texas Instruments BA II Plus and the Hewlett Packard 10bII BEWARE Do not buy the no name financial calculator available at some stores for about 7 00 It does not work Remember if something appears to be too good to be true it probably is Important I use the Texas Instruments BA II Plus in these instructions because it seems to be the most popular model If you have the HewlettPackard 10bII or a TI 83 84 graphing calculator please see the appendix before trying any problems with your calculator Chapter 1 Single Dollar Problems Present and Future Value There are three different methods for doing calculations 1 using a financial calculator 2 using formulae and a regular calculator and 3 using financial value tables and a regular calculator We will only use the first and easiest method in this class i e a financial calculator so you may ignore the sections of the textbook that show how to use either formulae or tables This gives you very little to read in the textbook which is good because success with a financial calculator depends a lot of practice This guide will have a few example problems and more will be assigned in individual topics But first a small bit of theory THE TIME VALUE OF MONEY Everyone prefers getting 100 today to getting 100 in five years But before we do any calculations we should consider why this is so We can isolate three separate motives for the time value of money that is three distinct reasons why you would prefer 100 today to 100 in five years 1 Inflation Prices go up so if I wait five years I can buy less with the 100 2 Opportunity Cost By delaying the payment I loose the opportunity to spend the 100 for the next five years 3 Risk In five years you may not have the money to pay me so waiting involves a risk of not getting 100 The interest rate is how fast money grows annually over time We get a return or interest rate on an investment to compensate us for waiting and accepting these three costs 1 13 19 Financial Calculator Guide 3 Terminology In different contexts the rate money grows over time may be called the interest rate the rate of return on an investment often shortened to rate of return or just return the compounding rate or the discounting rate TIME LINES When you are dealing with payments over time the easiest way to visualize them is to draw a time line such as the one below Time 0 1 2 3 4 N Today Today is 0 A year from now is 1 two years from now is 2 etc Until you are comfortable with these problems always start by drawing a timeline Future Value Problems How much will you have in your bank account 5 years from now if you deposit 100 today earn 10 interest per year and make no additional deposits For clarity examples will be underlined In this time line X represents the amount in my account in five years 100 X Time 0 1 2 3 4 5 Today This is a future value problem because I am asking the future value of a single dollar amount today The amount deposited today is called the present value and the process of going from the present value to the future value is called compounding Future value problems often have the general pattern How much future value FV will you have after N years if you deposit the present value PV today and get a I Y interest rate per year We will use a financial calculator to solve these problems but you should see the step by step calculations to understand what is going on Year 1 If start with 100 00 how much will I have after one year 100 00 1 10 110 00 1 13 19 Financial Calculator Guide 4 I multiply the 100 by 1 because I still have my 100 deposit and by 10 because that is the interest I receive for one year We combine these in one calculation by multiplying the 100 by 1 10 Year 2 I start the year with 110 00 in my account How much will I have after one more year 110 00 1 10 121 00 As in the first year I multiply the starting amount by 1 10 Year 3 I start the year with 121 00 in my account How much will I have after another year 121 00 1 10 133 10 You see that pattern multiple each year by 1 10 I don t need to do this in three different steps instead I can find the amount in year 3 from the original deposit 100 00 1 10 1 10 1 10 100 00 1 103 133 10 This is what our financial calculator will do but instead of worrying about formulae yes this one is easy and you could easily do it with a regular calculator but the formulae get more complicated later we just need to enter the data N 3 I Y 10 PV 100 00 into a financial calculator FUTURE VALUE ON YOUR CALCULATOR Now let s use your calculator Here are the most basic financial keys on the Texas Instruments BA II Plus later we will add a few more How much do …