Calculator Flashcards
How do you calculate for capital preservation, or capitalizing a number? What does this show?
Not a true time value of money concept. It;s used to determine the investment needed to provide the desired number of dollars through the use of interest only, leaving the principal untouched.
Desired income is divided by the assumed interest rate, expressed as a decimal.
Assume $30,000 is the desired income and the interest rate is 6%
$30,000 / .06 = $500,000
To verify the answer, multiply the capitalized value by the interest rate.
$500,000 x .06 = $30,000
Here an individual would need $500,000 in the bank, earning 6% to receive $30,000 per year forever. This DOES NOT factor in inflation, so the purchasing power of $30,000 would erode over time.
What are three levels of capital optimization?
1) capital utilization
2) capital preservation
3) capital enhancement - where the investment generates more return than is actually used by the investor.
”+ / -“ key - What’s the point?
Use “-“ or make a number negative
> when money is leaving the hands of the client - putting money into an investment or savings account, making a payment on a loan.
If Joe has money today and wants to know how much it will be at a future date, the “today” amount will be in negative, because it’s invested, it’s out of their hands. When it comes back to a person as a payment received or a future value, it will be a positive number.
PV and FV - one will always be positive, one will always be negative.
If you have a certain amount of $$ today, and making payments in addition to a deposit, both amounts should be the same sign - either positive or negative.
How do you check values for each component in a calculation problem? What key do you use?
If you are working on a problem and not getting an answer that matches your options, you can click “RCL” and each function to see what is being used there in the calculate.
Example - if N = 4 / PMT = 125 / PV = 35. You can click RCL N and it will show you that 4 is being used in the calculation. If that number is correct, you click N again and it will lock in the number for that component. If you get to PV and see you have 34 instead of 35, you can type in 35 and click PV to lock in the corrected number for that component.
How to set payments per year?
If you have a problem with interest compounded monthly, you would click 12 > shift > PMT (P/Yr). If it was semi-annually, you would click 2 > shift > PMT (P/Yr).
What three things should you do before starting to calculate any problem?
1) Make sure you’re in the right mode - BEG / END
2) Make sure you’re set up for correct number of periods per year
3) Click shift > C to confirm periods per year
David Dennison wants to have $40,000 per year at retirement, using only interest from his invested money. He expects to earn an average of 6.5% annually. How much does he need to have in the bank to provide this annual income?
Capital Retention - retain capital without touching principal. (use this in insurance module)
$40,000 / .065 = $615,385
When would numbers be entered as negative vs. positive?
Numbers should be entered as negative when cash is leaving your hands, such as when making an investment. Numbers should be entered as positive when cash is coming into your hands and you can spend it - such as when receiving interest payments or selling an investment.
Example - John is investing $1,000 into a fund, and anticipates earning 8% interest over the next 3 years.
1,000 > +/- > PV
John is investing $1,000 into a fund and anticipates earning 8% per year for the next 3 years. What would his investment be worth in 3 years if he were to earn an 8% return?
END mode
Compounding period - annually
Solving for - FV
Answer should be $1,259.71
How do you handle compounding periods that are more often than annual?
When calculating for more than annual compounding, you need to enter the number of years > Shift > N. This tells the calculator that it’s 3 years times whatever you’ve set the compounding periods to be.
John is investing $1,000 into a fund, and anticipates earning 8% interest, semi-annually, over the next 3 years.
Clear All 2 > Shift > P/Yr (sets to semi-annual compounding) $1,000 > +/- > PV 8 > I/Yr 3 > Shift > N = $1,265.32
Zoe plans on saving $500 at the end of each quarter for the next 10 years into her IRA account. If she earns 6% compounded quarterly, what will her account balance be at the end of 10 years?
END mode
Compounding periods - 4x/year
Solving for - FV
Answer should be $27,133.95
Zoe plans on saving $500 at the beginning of each quarter for the next 10 years into her IRA account. If she earns 6% compounded quarterly, what will her account balance be at the end of 10 years?
Known as “annuity due”.
BEG mode
Compounding periods - 4x/year
Solving for - FV
Answer should be $27,540.96
Zoe currently has $5,000 in savings and plans on saving $500 at the beginning of each quarter for the next 10 years into her IRA account. If she earns 6% compounded quarterly, what will her account balance be at the end of 10 years?
END mode
Compounding periods - 4x/year
Solving for - FV
Answer should be $36,611.05
Jonathan wants to accumulate $25,000 to establish a side business 7 years from now. If he can earn 4% compounded semi-annually, what amount would he need to have saved already in order to reach his goal?
END mode
Compounding periods - 2x/year
Solving for - PV
Answer should be -$18,946.8756
Simon wants to accumulate $100,000 in his 401(k) plan over the next 10 years. What amount would he need to contribute each year in order to reach this goal if he believes he can make 6% per year?
END mode
Compounding periods - 1x/year
Solving for - PMT
Answer should be -$7,586.80
