HP 10bII - Interest Rates; Two Types of Financial Problems; Recognizing a TVM Problem

Interest Rates
When you approach a financial problem, it is important to recognize that
the interest rate or rate of return can be described in at least three
different ways:
= Asa periodic rate. This is the rate that is applied to your money from
period to period.
и As an annual nominal rate. This is the periodic rate multiplied by the
number of periods in a year.
и 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 Y2% (per month), quoted as an annual nominal rate of 6% ('/2 X 12).
This same periodic rate could be quoted 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 are
on pages 72 through 73.
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 and 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.
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).
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4: Picturing Financial Problems 49