1.6.1.g1 (baii plus) introduction to financial calculators baii plus

1.6.1.G1 (BAII Plus)

Introduction to Financial Calculators

BAII Plus


© Family Economics & Financial Education – Updated April 2007 – Financial Calculators Unit – Introduction to Financial Calculators (BAII Plus) – Slide 2

Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences Take Charge America Institute at The University of Arizona

• How much the monthly payments would be on the perfect car?

• How much an investment could earn?

• How long it will take to pay off a DVD player?

Ever Wonder




These questions can be solved quickly and

easily with a financial calculator!

Here’s How…




Texas InstrumentsBAII Plus

Solar Business Analyst

Financial Calculator




How Does it Work?

• It solves time value of money problems.

• Before using the calculator:– Learn the underlying concepts and

functions it solves




Time Value of Money

• Dollars to be received or paid out in the future are not equivalent to those received or paid out today

• Compares present and future values of money by recognizing the interest rate (or investment rate of return) within a specific time periodPresentValue

Future

Value

TIME




Certificate of Deposit

Certificate of DepositIncrease in

value

Decrease in value

Would the future value of the money in a piggy bank increase or decrease over time?

Examples




Variables for the Time Value of Money

• i = interest rate• N = number of time periods• PV = present value• FV = future value• PMT = payment




Interest

• Interest– The price of using someone else’s

money• Interest Rate

– The percentage rate paid on the money borrowed or invested expressed as an annual percentage rate




Interest continued

• Simple Interest: Interest earned on the principal only

• Principal: the original amount of money invested

– Amount of interest earned is not affected by the amount of accumulated interest

• Compound Interest: Earning interest on interest– Interest earned on the principal amount plus

the accumulated interest• Can be compounded daily, weekly, monthly, etc.• The more frequent the compounding, the higher

the earnings




Number of Time Periods (N)

• Number of Time Periods: The number of times something will happen to a person’s money– Weekly, monthly, yearly, quarterly, etc.

• Convert the interest rate and the number of time periods to the same time periods before completing any calculations2 years = 24 months

2 years = 8 quarters




N continued

• Examples:– Money is compounded monthly over a

3-year time period so N = 36• 12 months * 3 years = 36 months

– An 18% APR would be divided by 12 if compounded monthly so the monthly interest rate would equal 1.5% each month• 18% APR / 12 months = 1.5% per month




Time Value Calculations

• Future Value (FV)– The value of an asset is projected to the end of

a particular time period• Present Value (PV)

– Determining the current value of an asset received in the future

The following calculations can be completed using a

financial calculator:




Time Value Calculations continued

• Single Sum– Refers to one single loan or amount invested

in one time period• i.e. simple interest

• Annuity– Refers to a series of payments within a

specified time period• i.e. compound interest

– PMT = payment• The amount to be paid for each specified time

period




Applications

• By using these formulas a person can:– Calculate the monthly payment on a

loan– Find the future value of an invested

amount– Calculate the time necessary to pay

off a loan– Determine the interest rate and

interest payments made on a loan or investment

– Compute the present value of an asset received in the future




Getting Acquainted with the Financial

Calculator




• Turn on the calculator• Press

– Clears incorrect entries

• Press– Clears financial register

0.00

Screen Display

ON/OFF

CE/C

2nd CE/CCLR WORK




Quit

x12 P/Y

2nd

CPT

Press and a main key to use the function above the main key

Two Function Keys

I/YN

2nd




Press

Decimal Function

Format2n

d

. 2 ENTER

Sets the decimal to 2

places

2.00

DEC =




Finance Keys

CPT ON/OFF

2nd

ENTER

PMTNxP/Y

QUIT

I/YP/Y

FVCLR TVM

PV




Finance Keys

N Number of periods

I/YP/Y

Interest rate per year

PV Present value

Number of payments per year




Finance Keys

PMT Payment

FV Future Value




• Must convert annual interest rate (APR) & annual number of periods to monthly

Credit/Debt Situations




Converting Interest Rate

• 8.25% APR is a yearly interest rate compounded each month

• Enter 12 payments per year (P/Y) P/Y

2n

d

I/Y 12

ENTER

12.00

P/Y =

Press




Standard-Calculator Mode

• After changing the P/Y value to 12.00, return to standard-calculator mode to continue

QUIT

2n

d

CPTPress

0.00




• 3-year car loan with monthly payments

• Convert to months by multiplying the number of time periods (3) by the P/Y value (12)

Converting Number of Time Periods

Press

xP/Y

3 2nd N N

36.00

N =

Pressing [N] sets the value into calculator’s memory




Example Calculations

• Monthly Payment• Future Value• Time Length




MONTHLY PAYMENT CALCULATIONS

• Turn power on• [2nd] Reset [Enter]• On/Off – Press twice• [2nd] Clr Work [Enter]• [2nd] Format 2 [Enter]• [2nd] P/Y (number of payments per year such as 12) [Enter]• [2nd] Quit• (number of years – such as 3) [2nd] [xP/Y] [N]• (amount of APR) [I/Y]• (loan amount) [PV]• [CPT] [PMT]




Monthly Payment Calculation

• Jim’s new bike Loan = $1,000 APR = 14.0% compounded monthly 1 year to pay

• What is his monthly payment?




Jim’s New BikePress Display

Turn power on ON/OFF 0.00

Reset [2nd] Reset [Enter] RST 0.00

Turn power off ON/OFF


Clear worksheet [2nd] Clr Work [Enter] 0.00

Set decimal to 2 places [2nd] Format 2 [Enter] DEC = 2.00

Set payments per year to 12 [2nd] P/Y 12 [Enter] P/Y = 12.00

Return to standard-calculator mode [2nd] Quit 0.00

Enter number of years 1 [2nd] xP/Y [N] N = 12.00

Enter interest rate 14 [I/Y] I/Y = 14.00

Enter loan amount 1000 [PV] PV = 1,000.00

Compute monthly payment [CPT] [PMT] N = -89.79




Interest Paid

$ 89.79 monthly paymentsX 12 months $1,077.45 paid

$ 1,077.45 paid-$1,000.00 loan ? interest paid




Interest Paid

$77.45 = The amount of interest

paid by Jim over one yearfor his new bike




Certificate of deposit or investment or future value

CALCULATIONS• Turn power on.• [2nd] Reset [Enter]• ON/OFF – press twice• [2nd] Clr Work [Enter]• [2nd] Format 2 [Enter]• [2nd] P/Y (number of payments per year such as 12) [Enter]• [2nd] Quit• (number of years – such as 30 [2nd] xP/Y [N]• (amount of APR) [I/Y]• (investment amount) [PV]• [CPT] [FV]




Future Value Calculation

• Molly’s certificate of deposit (CD) Invested = $3,000 APR = 6.5% compounded monthly 3 years

• What is the amount of money Molly will earn after 3 years?




Molly’s CDPress Display





Clear worksheet [2nd] Clr Work [Enter] 0.00

Set decimal to 2 places [2nd] Format 2 [Enter] DEC = 2.00

Set payments per year to 12 [2nd] P/Y 12 [Enter] P/Y = 12.00

Return to standard-calculator mode

[2nd] Quit 0.00

Enter number of years 3 [2nd] xP/Y [N] N = 36.00

Enter interest rate 6.5 [I/Y] I/Y = 6.50

Enter amount invested 3000 [+/-] [PV] PV = -3,000.00

Compute future value [CPT] [FV] FV = 3,644.01




Interest Earned

$ 3,644.01 amount earned after 3 years

- 3,000.00 principal amount? interest earned




Interest Earned

$644.01 = The amount of interest

earned by Molly over three years

for her investment in the certificate of deposit




TIME LENGTH CALUCULATIONS

• Turn power on.• [2nd] Reset [Enter]• ON/OFF – Press twice• [2nd] Clr Work [Enter]• [2nd] Format 2 [Enter]• [2nd] P/Y (number of payments per year such as 12) [Enter]• [2nd] Quit• (amount of APR) [I/Y]• (amount of payment) [PMT]• (amount of loan) [FV]• [CPT] [N]




Time Length Calculation

• Jason’s new flat screen TV Loan = $750 APR = 13.99% compounded monthly Payment = $75

• How long will it take Jason to pay for his new TV?




Jason’s TVPress Display





Clear worksheet [2nd] Clr Work [Enter]

0.00

Set decimal to 2 places [2nd] Format 2 [Enter]

DEC = 2.00

Set payments per year to 12

[2nd] P/Y 12 [Enter]

P/Y = 12.00

Return to standard-calculator mode

[2nd] Quit 0.00

Enter payment amount 75 [+/-] [PMT] PMT = -75.00

Enter interest rate 13.99[I/Y] I/Y =13.99

Enter amount of loan 750 [PV] PV = 750

Compute number of payments

[CPT] [N] N = 10.69




Interest Paid

• It will take Jason 10.69 months to pay off his new TV

$ 75.00 monthly paymentsX 10.69 months $802.08 total paid- $750.00 loan ? interest paid




Interest Paid

$52.08 =The amount of interest paid by

Jason over 11 months for his new TV




Conclusion

• Use a financial calculator to solve time value of money problems including:– Future value– Present value– Single sum– Annuity

1.6.1.g1 (baii plus) introduction to financial calculators baii plus

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