--%>

FIN 335: Time Value of Money Problems

FIN 335: Time Value of Money Problems 

Computed on a Texas Instrument BA II Plus financial calculator 

Before you start: 

? The calculator comes set to two decimal places. 

? The gray [2ND] key activates the functions that appear above the calculator buttons. 

Example: Above the PV key, AMORT is written in gray letters. To use it, press 2nd and then press 

[PV] = AMORT. 

? IMPORTANT: To clear previous work: 

Press [2ND] and [FV] CLR TVM (Clear Time Value of Money memory registers). 

Another clearing option is to press 2nd and Reset. It will reset the calculator to its original settings. 

? Most of the data entry will be value first, then the function. Example: press 4, then press N, the 

display will be N = 4. 

? Some values MUST be recorded in memory with the ENTER key. Be careful to make sure your 

entry has been acknowledged by the calculator. It will say the function you want set to the value 

entered. Example: P/Y = 4 or N = 36. 

? Payments are cash outflows and may appear as negative (-) depending on the calculator used. 

Problem 1: Computing Effective Rates (i.e., the Annual Percentage Rate - APR) 

Given: Pay 8% annually, compounded quarterly. What is the effective rate? 

Values: 

Periods/yr. = 4 

Nominal Rate = 8 

Calculator: 

1. Press [2ND] and then [I/Y] key. Press 4 and then ENTER. It will display: P/Y = 4.00 

2. Press [2ND] and then [CPT] key = QUIT. The display will go to 0. 

3. Press [2ND] and I CONV (you’ll find it above the number 2). 

4. The field NOM will appear. Press 8 and then press ENTER. It will display: NOM = 8. 

5. Press the ? key and EFF will display. 

6. Press the ? key again and C/Y will display. 

7. Press 4 and then ENTER. It will display: C/Y = 4. 

8. Press ? key and return to the EFF display. 

9. Press CPT and the calculator will return the effective rate of 8.24. 

Note: When you press [2ND] and the [I/Y] keys it opens the P/Y and C/Y memory registers. The 

display shows P/Y. If you press the ? key, you will see C/Y. When we set the P/Y value, the 

calculator automatically sets the C/Y to the same value. In these instructions, we set the P/Y value. 2 

Problem 2: Future Value 

Given: What is the future value of $1000 invested today at 8% per annum, compounded quarterly over 

5 years? 

Values: 

N = 5 NOTE: Five years covers 20 quarters so the N value is not 5 but 20 (5*4). 

PV = 1000 

I = 8 

P/Y = 4 

Calculator: 

1. Press [2ND] and [I/Y]. 

2. P/Y displays. Press 4 and ENTER. Display shows: P/Y = 4.00 

3. Press [2ND] and {QUIT}. The display will go to 0. 

4. Press 5. Press [2ND] and then xP/Y (it appears above N). “20” will display. Press N again. Make 

sure the display reads: N = 20. (The calculator is multiplying the C/Y value of 4 by 5). 

5. Press 1000 and then the PV key. The display should appear as: PV = 1000. 

6. Press 8 and then the I/Y key. The display should appear as: I/Y = 8. 

7. Press the CPT key and then press FV. 

8. The calculator will display the answer of $1,485.95 

Problem 3: Annuity 

An annuity is an accumulation. Examples are IRA and 401(K) programs. The payments will be 

negative (-) values; the Future Value will be positive (+), and the Present Value will be zero (0). 

Problem: 

? You want to retire in 30 years. You are starting to invest in a growth income fund that promises an 

ambitious rate of 15%. You can put in $200 per month. How much will you have in 30 years? 

Values: 

N = 30 NOTE: The payments will be monthly over 30 years: 30*12 = 360. N = 360 

P/Y = 12 

I/Y = 15 

PMT = -200 (Remember payments are negative.) 

Calculator: (need to reset P/Y and C/Y values) 

1. Press 2nd and then press I/Y. Press 12 and then press ENTER. 

2. P/Y = 12.00 in display. 

3. Press 2nd and then press QUIT. 

4. Press 30. Press 2nd and then xP/Y (it appears over the N button). 360 will appear. Press N. 

N = 360 will display. 

5. Press 15 and then press I/Y. I/Y = 15 will display. 

6. Press 200. Press the +/- key to the left of the = button. This will change the sign of the 200 from 

positive to negative. The display should be -200. Next press PMT. The display will be PMT = -

200. 

7. Press CPT and press FV. The answer displayed will be $1,384,655.92. 3 

Special Case of an Annuity: Amortization 

An amortization is a payment to pay down a loan that has been made in the present. 

Problem: 

You have an opportunity to take on a 30 year $100,000 mortgage at 7.5% interest. What will your 

monthly payments be? 

Values: 

N = 30 NOTE: The payments will be monthly over 30 years: 30*12 = 360. N = 360 

P/Y = 12 

I/Y = 7.5 

PV = 100,000 

Calculator: 

1. Press 2nd then press CLR TVM to clear out data from previous problems. 

2. Press 2nd and then press I/Y. Press 12 and then press ENTER. 

3. P/Y = 12 in display. 

4. Press 2nd and then press QUIT. 

5. Press 30. Press 2nd and then xP/Y (it appears over the N button). 360 will appear. Press N. 

N = 360 will display. 

6. Press 7.5 and then press I/Y. The display will be I/Y = 7.5. 

7. Press 100,000 and then press PV. 

8. Press CPT and then press PMT. The payment displayed will be -$699.21. 

   Related Questions in Finance Basics

  • Q : Explain Appropriation Appropriation :

    Appropriation: The authorization for a particular agency to make expenditures or make obligations from a particular fund for a particular purpose. It is generally limited in amount and period of time during which the expenses is to be

  • Q : What are Feeder Funds Feeder Funds :

    Feeder Funds: For lawful basis accounting purposes, funds into which some taxes or fees are deposited on collection. In some situations administrative costs, collection expenses, and refunds are paid. The balance of such funds is transferable at any t

  • Q : Describe the benefits of paying late

    Describe the benefits of "paying late" (but not too late) and how do companies try to do this? Since money has time value, the later cash is paid, but not too late, the better. Companies employ remote disbursement banks to facilitate holding at

  • Q : What is Finance Letter Finance Letter

    Finance Letter (FL): The proposals made, by the Director of Finance to the chairpersons of the budget committees in each and every house, to amend the Budget Bill and the Governor's Budget from that presented on January 10 to reflect a revised plan of

  • Q : Describe value investing Value

    Value investing is an investment strategy which involves buying securities whose shares appear underpriced by some form(s) of fundamental analysis, like stocks with low Price to Earning or Price to Book value. This strategy basically is of buying stoc

  • Q : How do mergers influence communities

    How do mergers influence communities?While a locally controlled bank is merged into a bank headquartered elsewhere (an out-of-market merger), some of the apprehension regarding the institution's future commitment to the local community is bound

  • Q : What is Reverted Appropriation Reverted

    Reverted Appropriation: An appropriation which is reverted to its fund source after the date its liquidation period has terminated.

  • Q : Describe the financial leverage effect

    Describe the financial leverage effect and what causes it? Explain the potential benefits and negative consequences of high financial leverage? Financial leverage is the additional volatility of overall income caused through the presence of fix

  • Q : How cash and capital budget relate to

    Describe how the cash budget and the capital budget associate to proforma financial statements.The cash budget illustrates the projected flow of cash in and out of the firm for particular time periods. The capital budget illustrates planned expe

  • Q : What is Working Capital and Revolving

    Working Capital and Revolving Fund: For legal base accounting purposes, fund categorization for funds employed to account for the transactions of self-supporting enterprises which render goods or services for a direct charge to the user that is genera