Two Types Of Financial Problems - HP 10bII+ User Manual

• 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
quoted as an annual nominal rate of 6% (
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.

Two Types of Financial Problems

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
Keys
Ù
Ò
Ï
Ì
É
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
1
/ × 12). This same periodic rate could be quoted
2
Description
Number of periods or payments
Annual percentage interest rate (usually the annual nominal
rate)
Present value (the cash flow at the beginning of the time
line)
Periodic payment
Future value (the cash flow at the end of the cash flow
diagram, in addition to any regular periodic payment).
1
/ % (per month),
2