© Steven J. Willis 2006 1 F INANCIAL C ALCULATORS FOR L AWYERS Lesson Four Calculator Terminology F...

© Steven J. Willis 2006 1

FINANCIAL CALCULATORS FOR

LAWYERS

Lesson FourCalculator Terminology

FINANCIAL CALCULATORS FOR

LAWYERS

Lesson FourCalculator Terminology


Calculator Terminology

• Financial calculators have seven basic function keys– Present Value (PV)– Future Value (FV)– Payment (Pmt)– Interest (I) or (I/yr)– Number of Periods (N)– Mode– Payments per Year (P/Yr)


















• Financial calculators have seven basic function keys– Present Value (PV)– Future Value (FV)– Payment (Pmt)– Interest (I) or (I/yr)– Number of Periods (N)– Payments per Year (P/Yr)– Mode







For our purposes you will always know the mode.







You will always know (or need to estimate) five of

these six functions.












The calculator will solve for the missing

function.

The calculator will solve for the missing

function.



That is the point of the financial

calculator


calculator




calculator


calculator

To solve for a missing function.

To solve for a missing function.



If you only know four of the six functions, you

must nevertheless estimate, logically

deduce, or “make up” one of the two missing

functions.




functions.






functions.




functions.

No calculator will solve for two

missing functions.

No calculator will solve for two

missing functions.



For example:

If you know

• how much you borrowed for your home loan (PV)

• the interest rate (I/yr)

•that you intend to pay it off to zero (FV)

•that you want monthly payments (P/yr)

•you cannot solve for both the time period and the payment amount.

For example:

If you know








For example:

If you know






For example:

If you know








For example:

If you know






For example:

If you know








For example:

If you know






For example:

If you know








For example:

If you know






For example:

If you know








For example:

If you know






For example:

If you know






You may tell the calculator the

time period (N)– perhaps 30 or 15 years – and it will

tell you the needed payment

(Pmt).

You may tell the calculator the

time period (N)– perhaps 30 or 15 years – and it will

tell you the needed payment

(Pmt).



For example:

If you know






For example:

If you know






Or, you may tell the calculator

that you want to pay $1,500

monthly (Pmt), and it will tell you how long that will

take (N).

Or, you may tell the calculator

that you want to pay $1,500

monthly (Pmt), and it will tell you how long that will

take (N).

You may tell the calculator the time

period – perhaps 30 or 15 years – and it

will tell you the needed payment.


period – perhaps 30 or 15 years – and it




For example:

If you know





• But, you cannot solve for both the time period and the payment amount.

For example:

If you know





• But, you cannot solve for both the time period and the payment amount.


period – perhaps 30 or 15 year – and it



period – perhaps 30 or 15 year – and it


Or, you may tell the calculator that you want to pay $1,500 monthly, and it will

tell you how long that will take.

Or, you may tell the calculator that you want to pay $1,500 monthly, and it will

tell you how long that will take.



On a handheld calculator – such as an HP10BII –

the six functions are found along the top row

of keys.



of keys.





of keys.



of keys.

N for number of periods.





of keys.



of keys.

I/YR for nominal interest per year.





of keys.



of keys.

PV for present value.





of keys.



of keys.

PMT for payment.





of keys.



of keys.

FV for Future Value.





of keys.



of keys.

P/YR for payments per year (or periods per

year).



On the Electronic Calculators used in this Course or

on the CD, all function keys are always displayed

clearly.



clearly.



The Six critical function keys

always appear.

The Six critical function keys

always appear.



Also, several other important, but less critical function keys

always appear.

Also, several other important, but less critical function keys

always appear.





clearly.



clearly.

Also, the values for each function always appear.

Also, the values for each function always appear.



• Present Value

– This function inputs or solves for the value today of either

• A sum in the future• A series of payments in the future.




this function key is found along the top row of keys.



PV for present value.



On the Electronic Calculators used in this Course or on the CD, this function keys is

always displayed, along

with its value.



with its value.



• Present Value





• Present Value





• Present Value





• Present Value





• Present Value





• Present Value





• Present Value



If you know the future value and the interest rate and time period, then you

solve for the present value.





• Present Value







If you know the present value, then you must be

solving for another function, such as the

future value or the series of withdrawal payments

that the present value can generate.

If you know the present value, then you must be


future value or the series of withdrawal payments

that the present value can generate.



• Future Value

– This function inputs or solves for the value at some date in the future of either

• A current sum• A series of payments in the future, ending

before the future date.







FV for Future Value.





with its value.



with its value.



• Future Value

– This function inputs solves for the value at some date in the future of either





• Future Value






• Future Value






• Future Value






• Future Value






• Future Value






• Future Value




If you know the present value and the interest rate and time period, then you solve for the future value.




• Future Value






If you know the future value, then you must be

solving for another function, such as the present value or the

series of deposit payments needed to

generate the future value.

If you know the future value, then you must be

solving for another function, such as the present value or the

series of deposit payments needed to

generate the future value.



• Payment

– This function inputs or solves for the value of a regular deposit or withdrawal







PMT for payment.





with its value.



with its value.



• Payment




• Payment




• Payment




• Payment




• Payment


If you know the present or future value and the

interest rate and time period, then you solve for the payment amount that the present sum would generate or the needed deposit to result in the

future value.



future value.



• Payment




future value.



future value.

If you know the payment value, then you must be


present or future value of the series of deposits.

If you know the payment value, then you must be





• Interest








I/YR for Interest per year.





with its value.



with its value.



• Interest




• Interest




• Interest




• Interest

– This function inputs or solves for the nominal annual interest rate



• Interest


If you know the present and future value, the

payment amount and the time and frequency

period, then you solve for the interest rate.






• Interest


If you know the interest rate, then you must be



If you know the interest rate, then you must be











• Interest


In Lesson Five, we will focus on interest rate terminology. We will

distinguish nominal rates from periodic rates, from effective rates,

and from an annual percentage rate.

In Lesson Five, we will focus on interest rate terminology. We will

distinguish nominal rates from periodic rates, from effective rates,

and from an annual percentage rate.



• Number of Periods








N for number of Periods.





with its value.



with its value.
















– This function inputs or solves for the total number of periods






payment amount and the frequency and interest rate, then you solve for the number of periods.







If you know the number of periods, then you must be


present or future value of the series of deposits or

for the interest rate.

If you know the number of periods, then you must be


present or future value of the series of deposits or

for the interest rate.







• Payments Per Year (or periods per year)








P/YR for number of Periods or Payments

per year.





with its value.



with its value.
















– This function inputs or solves for the total number of periods or payments per year





Another way of defining

this is as the compounding

period.



period.







period.



period.

The Nominal Annual Interest

Rate compounds at this frequency.

The Nominal Annual Interest

Rate compounds at this frequency.





We can call this “Payments per year” or

“Periods per year.”











They will always be the same. Lesson Five will explain the following Law of Finance:











The compounding period (periods per year) and the payment period (payments per year) must

either be identical or be 1.


The compounding period (periods per year) and the payment period (payments per year) must

either be identical or be 1.






payment amount, the total time period and interest rate, then you solve for

the number of periods per year.








If you know the number of periods per year, then

you must be solving for another function, such as

the present or future value of the series of

deposits or for the interest rate.

If you know the number of periods per year, then

you must be solving for another function, such as

the present or future value of the series of

deposits or for the interest rate.









• Mode





this function key is found on the second row of

keys.


this function key is found on the second row of

keys.

BEG/END for mode.





with its value.



with its value.



• Mode

– This function defines the timing of the initial payment in a solves for the value of a regular deposit or withdrawal



• Mode

– This function defines the timing of the initial payment in a

• Sinking Fund



• Mode


• Sinking Fund• Annuity



• Mode



Begin Mode occurs when the first payment is at the beginning of

each period.


each period.



• Mode




each period.


each period.

End Mode occurs when the first payment

is at the end of each period.

End Mode occurs when the first payment

is at the end of each period.

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© Steven J. Willis 2006 1 F INANCIAL C ALCULATORS FOR L AWYERS Lesson Four Calculator Terminology F...

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