General Principles: Chapter 4 Flashcards
What are the basic items you will use on the financial calculator?
PV, FV, PMT, I/Y and N.
2nd I/Y will allow you to change the payments per year.
For example if you are given a problem that has 8 years, but payments are made monthly, you would hit 2nd I/Y hit 12 then enter.
For N you would hit 8, 2nd N to give you the total number of payments, then press N again and enter.
Make sure calculator is set for 4 decimal places and always hit 2nd CLR WORK after you are done with a problem.
Money going into a clients account entered as a payment is put in how?
Going into is positive.
CD or bond interest received
Dividends received
Pension or IRA Distributions received by the client
Withdrawals from mutual funds received by client
Rent received from an investment property
What about money going out of an account as a payment?
Going out of is entered as a negative.
Investements, repair made to investment property, pension or 401(k).
When should you use BGN vs END mode on a financial calculator.
Whenever the question states specifically at the beginning. But here are general rules of when to use each.
BGN: College tuition paid, Retirement benefits received, family
needs
END: 401(k) deferrals, Profit sharing contributions, bond
interest paid, mortgage payments
What is the real rate of return and what is the formula for it?
The inflation adjusted interest rate.
[(1+After Tax Return / 1+Inflation Rate) - 1] x 100
What do you use on your financial calculator when an equation has unequal cash flows.
CF button. Enter the initial cash outflow, then each cash flow and the number of times that cash flow occurs in a row. For the final cash flow take the net of the incoming cash and the outgoing cash and enter that. Then hit the NPV button, enter the expected rate of return and compute the NPV.
If NPV is positive IRR > Expected return
If NPV is negative IRR < Expected return
