Introduction to Time Value of Money

Question 1

The Hewlett-Packard HP10BII+ Calculator

Answer 1

• TVM keystrokes in your materials may be for an HP10BII calculator.
• The HP10BII+ recently replaced the HP10BII (increased memory).
• Keystrokes in your materials work for both calculators.
• Please Note: One important HP10BII+ key may be different than
the description in the materials.
o In materials (written for HP10BII) this key is called the “gold” key.
o On the HP10BII+ it is referred to as the [SHIFT] key.
o This key is red/orange and has a down-arrow symbol on it:
o The function is identical, but the appearance is slightly different.
o With the HP10BII+ calculator, use the [SHIFT] key whenever the
“gold” key is indicated for calculation in your materials.

Question 2

Some Calculator “Must Know” Items

Answer 2

• Set your calculator for 4 places to the right of the
decimal to avoid rounding errors.
• Set and change payments per year to use the
correct number of compounding/payment periods.
• Clear registers (memories) completely
between calculations.
• Outflows of cash should be negative.
• Begin/End modes are only significant when a
calculation involves a payment.
• Payments made for retirement and education are
always in Begin Mode.
• One-time payments are present value.
• Repetitive inflows or outflows are payments.

Question 3

Basic TVM Calculations

Answer 3

• Capitalization of a Number
• Future Value of a Single Sum
• Present Value of a Single Sum
• Number of Compounding Periods
• Interest Rate per Compounding Period
• Present Value of an Annuity
• Future Value of an Annuity
• Periodic Payment or Receipt

Question 4

Time Value of Money Concepts

Answer 4

• Future Value (FV)
• Present Value (PV)
• Compounding Periods (N)
• Interest Rate (I/YR)
• Annuity Payments (PMT)
o Ordinary Annuity (OA): payment at the end
o Annuity Due (AD): payment at the beginning
o Periodic Payment: level payment
o Serial Payment: increasing payment

Question 5

Intermediate TVM

Answer 5

• Present Value (PVAD) of a Serial Payment

* Serial Payment for a Future Sum

Question 6

Three Steps of Present Value Serial Payment Process

Answer 6

1. Inflate One Payment Rate of Inflation
2. PVAD Serial PMT Calculation Inflation-Adjusted Rate (BEG)
3. Discount Step 2 Result Discount (Investment) Rate

Question 7

Formula for Inflation-Adjusted Interest Rate (IAIR)

Answer 7

[1+ interest rate / 1+ inflation rate - 1] x 100

Question 8

The need at the end is Future Value (FV)

Answer 8

Change +/- for monies coming out of the wallet. It is an Outflow. Inflow no change

Question 9

Calculations should be based on yearly payments

Answer 9

Semi 2 payment per year

Question 10

Annuity Payments: Series of Equal Payments

Answer 10

Amount Received/Paid/Required Given PV or FV, I/YR, and N, solve for PMT

Question 11

Interest Rate (I/YR): Rate of Growth or Discount Rate

Answer 11

Given PV, FV, and N, solve for I/YR

Question 12

Compounding Periods (N): Number of Periods

Answer 12

Length of time given PV, FV, and I/YR, solve for N

Question 13

Present Value (PV): Current Dollar Value

Answer 13

At the beginning given FV or PMT, I/YR, and N,

solve for PV

Question 14

Future Value (FV): Future Dollar Value

Answer 14

At the end given PV or PMT, I/YR, and N, solve for FV

Question 15

Serial Payments will

Answer 15

Increase overtime due to inflation so always calculate inflation rate