HP10BII -- Introduction and 5-Key Time Value of Money Examples

In this video we're going to introduce the HP 10bII financial calculator as well as walk through a couple of examples on how to use it for calculations with what I refer to as the five key approach before we go through the calculations let me introduce the calculator a little bit. this is your HP 10bII financial calculator Up in the top row you'll see what we refer to as the five key approach The number of periods interest rate present value, payment and future value Most of our time value money calculations will use those five keys We also will occasionally use this cashflow button when we deal with uneven cash flow streams to calculate a rate of return, interest rate per year, or our net present value A quick overview before we get started going through the calculations. A couple of key things one is shift buttons There are actually two shift buttons on the HP 10bII One is a blue shift button The other is orange Notice that as you look at the calculator some of the buttons have a shift that is blue or functions that are blue and functions that are orange All the time value money button shifts that we want are orange so whenever I say shift I'm always talking about this orange key here. The blue is more for some statistical functions, but for the time value money functions we're always referring to the orange shift whatever we say shift So let's good ahead and turn our calculator on When we do that we will see that the default setting for the calculator is two decimal places Financial calculators normally assume people want to see dollars and cents, so that's the default setting While that's convenient for a lot of calculations, there are sometimes I want more than two decimal places. Maybe I'm calculating a percentage or doing something else and I don't want it to round off to two decimal places. So the first thing I want to do with my calculator is change the number of decimals that it will display to nine.

That's the maximum the HP 10bII will display I like to send it to the max that way i can round off to what I feel is appropriate If you want to you could set it to five or six or something else if you don't want that many decimals but again I want to set it to the maximum, then I can choose they appropriate number to round off to. So to do that I'm going to use this DISP for display function Note that that's a shift, it's in orange so to change that I want to do -- shift DISP and now I want to tell it how many decimals I want to display The screen there has two decimals on it I'm going to press nine and once I do that, my screen now has nine decimal places displayed on there So now it's got the maximum number of decimals. Another setting that I'm going to change right now, just to familiarize you with it, is this periods per year.

Sometimes we'll do calculations with annual payments, and that's where we'll start out But other times you might want to do monthly -- maybe you're figuring a car payment or a mortgage payment. Or maybe you want to figure savings for retirement and you're going to save out of every paycheck. You get paid bi-weekly that's 26 periods per year So different problems are going to require different periods per year. In order to see what it's set at if you hold down on this clear all button you'll be able to see your periods per year That's in orange so we have to do the shift, press the clear all and hold it. When you hold it, you see your calculator showing what periods per year it's currently set for. And right now my calculator is currently set for two periods per year for semi-annual -- will use that with bonds. But you might see 12 there, you might see 1 there, whatever it's currently set at. Now in order to change that you need to tell the calculator what you want to be So we're gonna set our default to one period per year.

So just press one and then we want to enter that as our P/YR Again, that's a shift function so we have to press shift and then periods per year Now when I go do that shift clear all Notice my on-screen display says one period per year That's what I want Now, your periods per year will stay at whatever you set it at until you change it. If you want it to be monthly and you set it to 12 it's going to stay that way until you change it back. Turning your calculator off and back on does not change the periods per year. Remember anytime you're changing from one type of P/YR to another you have to set your calculator up to do that. Another setting which we're not going to use very often in class, but sometimes comes in handy is the Begin/End setting and this deals with annuities Annuities are equal periodic cashflow streams and somewhere you might encounter an annuity might be a mortgage payment our a retirement saving situation where you're saving $100 per month every month. Note that in both of those situations you making the same cash flow every period over a fixed number of times. Normally we assume cash flows come at the end of each period, but occasionally the come at the beginning of each period. The default setting on your calculator is end of period and that's what we're gonna use most often.

But if you see a problem that says cash flows come at the beginning of each period you need to change your calculator for that. In order to change your calculator you want to use this begin/end function here. Again its a shift, so your going to have to press the shift function to get there What that does is every time you press that, it toggles it back-and-forth. See on the bottom of your screen now it says BEGIN If I press it again, shift begin/end that'll disappear. Shift begin/end and it's there.

so whenever it says begin on the bottom of your screen, your character is set for beginning of period payments If you see that and you don't want beginning a period payments you've got to change it or you're going to get the wrong answer. Again, if you see begin, you're set for beginning of period. If you see nothing, you're set for end Let's go ahead and set it for end right now. So we need to get rid of that began by toggling.

Shift begin/end and now we are set for end of period payments, which is what we want. So our calculator is all setup now -- one period per year, maximum number of decimals displayed, and end of period payments. So now let's go ahead and get to a problem. deposit seven thousand into the bank today an earnest six-and-a-half percent rate of return our interest rate then note that terminology here sir rate of return park interest rate technically this would be in interest-rate because that's alone figure making two the bank and so they're going to pay you pay interest but a lot of investments such as stocks are mutual funds are commodities are precious metals don't pay interest in said you're hoping to turn our rate of return sana promise rate of return but that's what you're hoping to get off of your investment and so you might see the term rate of return instead of interest are you might see discount rate our rate of growth or some other term along those lines we won't know how much you can have after fifteen years solar trying to find is the future back at how much are going to have it the end of the time period so in this problem greasing are five key approach stands for the number of periods i slash y r is going to be your key interest rate t_v_ use your present value what you're starting with the bear which you want to find out of it future cash flow stream is worth to you today pm teaches the annuity your teeth will periodically actual and then kathy is your future value what the money is going to grow to over time in this problem or trying to solve for the future value and we do not have app t_n_t_ real have no new the strain of that sort of have to zero that out so what we're gonna put into our calculator is fifteen years for ken par interest is six point five percent but that is six point five are present value peers seven thousand that's what we're starting with today we don't have an annuity streams organs hero that out everyone assault for our future value so now let's go to our financial calculator and show you exactly how the internet one thing you might want to do when you start a problem justice clear all make sure everything's cleared out but you don't need to do that as long as you can are all five keys pty tutors shift clear all no clear everything out but again as long as retainer four keys can insult for the fifth one everyone serena start with him in the way to do that is make sure you put the number and then put it came to end don't press and fifteen that will work you've got a press fifteen m sonoran oppressed fifteen coli can kini put that in next room lockhart interest rate six point five percent six point five i slash y r perhaps that seven thousand for present value seven thousand tvm zero out our new destroying can everyone assault for future value the day to be ten b two when you are sold for one of the five keys after you put in the other four u just press the on your salt for story got distress that heavy reiki teen thousand two dollars and eighty nine cents so that's our future value no on here that actually comes out as negative eighteen thousand can i'm gonna talk a little bit more about that is removed through this series of examples let me go ahead and introduce the idea there what the calculator is always doing is trying to balance things out you told the calculator because you know this is positive if you were getting seven thousand we actually did this problems out from your perspective but from the perspective of the bank the bank received seven thousand today so it had to pay back eighteen thousand two dollars and eighty nine cents after fifteen years to the person that made the deposit if you wanted to be the person that made the deposit you could enter that is negative seven thousand you gave up to seven thousand today and your cac illiterate giving you a positive eighteen thousand here in this now the reason i don't worry about it in this problem is because as long as read no who rearm we can decide whether or not to include that negative value and our answer and since you're looking at it from our perspective region include the negative experimenter yet eighteen thousand however there are three important keys to look at for whether signs matter peavey can t an efi those all represent cash flows and if you enter two or more non-zero values for your cash flows thing you have to be careful about cash full sun we entered two values for cash flows that's all for the third but one of the values that we heard was a xerox really had one non-zero value the sinus dynamic impact our answer can just ignore the sign when we get our solution little bit later on we'll see some examples where the sign is critical that we do have to watch out for that smell it's go to another example this time we're saving for retirement and now we're going to introduce that annuity strain you're saving for retirement and you want to say four thousand per year at the end of each year now the seat ki sign that you need an annuity string here is that per year he can see the words per year every year each month there every week or something like that that indicates you're making the same cash flow are you're receiving the same cashflow payment every period for a fixed number of period you're dealing with an annuity strength cell four thousand per year tells us we're dealing with an annuity and i have a p m t value first-time ca twenty five year time horizon eight percent return how much her you have after twenty five years now here were asking for the future value because we won't know how much of their habit the end of the twenty five years dot what is it worth today how much a reality into the twenty five years so again are five keys part of the aam i slash y r peavey pm teeny and the f_b_i_ which are going to sell for now are n three said it was twenty five year supply five periods are interest rate is two eight percent are present value no we don't have any present value there's nothing that says you already have xd our state today celebrants hero that out are only cash flows of four thousand per year that we're going to be saving at the individual year the next twenty five years that's our annuity stream of four thousand dollars or an assault for the future value go to our financial calculator go ahead and hit clear cancel a couple times to clear out your screen and now i want to put in the values twenty-five n park high slash y r is paying are present that u is zero our payment his four thousand and now we want to compute future value so this press theft the button and after twenty five years for going to have two hundred ninety two thousand four hundred twenty three dollars and seventy six cents can we can ignore the negative sign because we only have one non-zero value put him notes modify this problem a little bit so that instead of starting with nothing we start the twenty five-year savings period with fifty thousand dollars already say to reducing the same setup trying to save for twenty five years save four thousand dollars per year at the end of each year stood in a current eight percent return but now we've already got the fifty thousand dollars safe so par five key approach can have twenty-five cows are pen are interest rate still the eight percent but now we have a president died fifty thousand already saved fifty thousand his are present value and our payment four thousand and we're still solid for the future back now remember before when i said uh... mercer dot com out that negative values i said if free have two or more non-zero values for three cash flow related buttons we have to be careful about side prevent it we have fifty thousand for present value four thousand for a payment so we've got to non-zero inputs that were putting into our calculator if ur not correct in how we put up signs we can get the wrong answer in this particular prom its ok if they're both positive took eight there both negative but you can't have one positive or negative or you can get the wrong cancer is both of these cash flows are going in the same direction dominant try to make this one the correct way from the perspective of us as the investor we saved fifty thousand dollars already upfront which means you read gave up that fifty thousand dollars we set it aside put it into the bank so that we can get money back in the future in addition we're giving up that four thousand dollars every year in order to get money back in the future so these are both going to be cashed alp flows and negative so that we can get back a positive cash inflow at the end now when you can or cash flows has a negative you have to be careful use your plus minus q on your calculator not here subtract let's walk through that on our calculator you know let's go ahead and start by putting in a car twenty five and are p interest rate and now we're gonna get to you our present value to do that lets go and put in the fifty thousand but before requests the present value now we need to make it negative and to do that you want to use the plus minus q and your calculator appear you can see plus minus don't use this in track keith that won't work how to be the plus minus q in order to switch that negative so much you've put in the fifty thousand press the plus minus he could see that changes your value to native fifty thousand samaritan put that in is the present time same thing for the payment four thousand plus minus make it negative put that in for the payment so now we've got are twenty five an p interest negative fifty thousand present value figure four thousand payment hall we have to do is solved for our future value knows that comes out positive now six hundred thirty four thousand pay from forty seven dollars and fifty two cents so having that extra fifty thousand dollars saved already make quite a bit indifference and how much we're gonna have available to us at the end of the twenty five years our next problem resolved for something other than future value the examples we've done it on our soil for future value now we're going to solve for the interest rate so what we're asking here's what interest rate are returning were offered seventeen thousand four hundred and he hears exchange for ninety five hundred dollars today sore effectively lending are giving up ninety five hundred dollars today so we can get back seventeen thousand four hundred eight years from now we want to figure out what rate of return of what interest rate were coming on that loan our investment that already get five key approach i slash y r peavey p and t efy but now it's of solving for the future value like we were before now we're going to be solving for this interest rate so our n is the ears chipset p and are present value is the ninety-five hundred they were giving up today now giving that up today so it's going to be negative and there are gonna get back seventeen thousand four hundred eight years from now getting that back eight years from now so that's our future value we don't have an annuity stream here so we're gonna zero power working mt there is no annuity clear that out of our calculator instead put in the values reno sulphur water trying to find let's go to our calculator and we want to start with uh... aitken and put that in skipping over the interest rate now because that's what we're gonna solve force were in a move on to the present value present value is negative rear giving that up so ninety five hundred if that plus minus q to make it negative present value we don't have an annuity strange sarisi row that out to zero p m t an alas leah's are seventeen thousand four hundred future value that we're getting back at the end of the eight years want to be out those all setup we consult furniture straight mcginnis press the button you're trying to sell interest rate on this loan investment is seven point eighty six percent so that's going to be our rate of return or investing ninety five hundred today returning average annual rate of return seven point six percent over the next eight years now let me to show you that what happened if you're not careful with science ping you heard those making one of them negative sold us real quick eight is rpm excelling for the interest rate to make the ninety-five hundred present value positive to make the seventeen thousand four hundred future value that we're going to receive later positive zero out our payment sulfur interest think is a snow solution calculators telling us there's no interest-rate out there where you can get ninety five hundred today and get seventeen thousand four hundred eight years from now not giving up any cash flows the only way to get seventeen thousand four hundred eight years from now is to give something up party give up a new iti c have to have a negative value in a positive value whenever you're selling for the interest rate last example really go back to us talking about periods per year and we're going to recognize that not all problems are done on an annual basis so now we're looking at a car lot in a purchasing a car that's going to cost twenty five thousand dollars you have five thousand available for a down payment heavy borrowing the remainder of three point nine percent over five years everyone i know a monthly payments gennady city were there when you see monthly you've got a set your calculator twelve periods per year so one of the things you need to recognize that snake calculator has to be set for twelve periods per year also and doesn't stand for a number of years but it stands for the number of periods five years f twelve periods per year is a sixteen months in order to work with known enable com prodding periods you have to do both changer periods per year and make sure your entering a number of periods not the number of years completed five the approach solving for monthly payments or solving for that in new woody and now we have to figure out what the rest of the values are saree said are and was sixty sixteen monthly time periods are key interest rate is a three point nine percent they were borrowing money out now present value sublets a little bit tricky because a lot of people see that five thousand for down payment say while making a down payment today so that must be my present value but whenever you're dealing with alone regardless whether it's a car loan a mortgage loan or any other type of loan the present values the amount you're borrowing and in this case your car is going to cost twenty five thousand dollars and from that point five thousand dollars you've got five thousand but already covered from your down payment so the difference between those is twenty thousand that's how much you're going to borrowed stick that's how much you have to pay back so the present value that's the difference between the purchase price your down payment how much you're borrowing start this law now that we've got that our future value peter values zero because we don't always saying after last payment so there were displayed those into the character i remember the first thing we had to do was changed her periods per year two twelve need twelve periods per year so to do that press twelve shift periods per year so shift credits per year dark actors set for twelve periods per year p_d_ that shift clear all you'll see that sunaari puttin are sequence sixty three point nine interest per year twenty thousand that were borrowing receiving that money today surging go buy the car with it so that's positive twenty thousand zero out our future valium sulfur or payment this press that pmd button and it's going to requires make monthly payments of three hundred sixty seven dollars and forty three cents notice that comes out is negative because we received the twenty thousand today from the bank so we have to pay the bank back three hundred sixty seven positive cash inflows today outflow which is negative for our monthly payment that should be introduce you to do your texas instruments here h_p_ ten b two financial calculator and help you get started on five key approaches hopelessly has been helpful.

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