Two Types of Financial Problems

•As a periodic rate. This is the rate that is applied to your money from period to period.

•As an annual nominal rate. This is the periodic rate multiplied by the number of periods in a year.

•As an annual effective rate. This is an annual rate that considers compounding.

In the previous example of a 1,000.00 savings account, the periodic rate is 1/2 % (per month),

quoted as an annual nominal rate of 6% ( 1/2 × 12). This same periodic rate could be quoted as an annual effective rate, which considers compounding. The balance after 12 months of compounding is 1,061.68, which means the annual effective interest rate is 6.168%.

Examples of converting between nominal and annual effective rates can be found in the section titled, Interest Rate Conversions in the next chapter.

The financial problems in this manual use compound interest unless specifically stated as simple interest calculations. Financial problems are divided into two groups:

•TVM problems

•Cash flow problems

Recognizing a TVM Problem

If uniform cash flows occur between the first and last periods on the cash flow diagram, the financial problem is a TVM (time value of money) problem. There are five main keys used to solve a TVM problem.

Table 5-1 Keys for solving a TVM problem

KeysDescription

Ù	Number of periods or payments
	Number of periods or payments

Ò	Annual percentage interest rate (usually the annual nominal
Ò	rate)

Ï	Present value (the cash flow at the beginning of the time
Ï	line)

Ì	Periodic payment
	Periodic payment

É	Future value (the cash flow at the end of the cash flow
É	diagram, in addition to any regular periodic payment).

You can calculate any value after entering the other four values. Cash flow diagrams for loans, mortgages, leases, savings accounts, or any contract with regular cash flows of the same amount are normally treated as TVM problems.

For example, following is a cash flow diagram, from the borrower’s perspective, for a 30-year, 150,000.00 mortgage, with a payment of 1,041.40, at 7.5% annual interest, with a 10,000 balloon payment.

58 Picturing Financial Problems

10bII+ Financial specifications

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At the heart of the HP 10bII+ is its ability to perform a wide variety of financial functions, including time value of money calculations, cash flow analysis, bond pricing, and depreciation. Its built-in functions facilitate the computation of interest rates, present and future values, net present value (NPV), internal rate of return (IRR), and annuities. This array of functionalities allows users to tackle complex financial problems with ease.

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Additionally, the HP 10bII+ is powered by two AAA batteries, providing a long battery life that ensures reliability during extended use. It also features an automatic shut-off function, which conserves battery life when the calculator is not in use.

In summary, the HP 10bII+ Financial Calculator is a high-performance device that combines essential financial functions with user-friendly design and robust technology. Whether for educational purposes or professional finance work, its capabilities make it an invaluable asset for anyone dealing with financial calculations and decision-making.

HP 10bII+ Financial manual Two Types of Financial Problems, Recognizing a TVM Problem

Models: 10bII+ Financial