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If the picture at right doesn't match your calculator, you may have an
original HP 10B. These calculators differ slightly, so you may prefer the
HP 10B tutorial.
The Hewlett Packard 10BII is a very easy to use financial calculator that
will serve you well in all finance courses. This tutorial will demonstrate
how to use the financial functions to handle time value of money problems
and make financial math easy. I will keep the examples rather elementary, but understanding
the basics is all that is necessary to learn the calculator.
Please note that in the following text the orange key is referred to as
Shift
because it is used
to shift to the orange-colored function below the key that is pressed next. We will not need
the purple shift key in this tutorial.
Initial Setup
Before we get started, we need to correctly (in my view, anyway) set up the calculator. The
10BII comes from the factory set to assume monthly compounding. That's fine, I suppose, but
its better to set it to assume annual compounding and then make manual adjustments when
you enter numbers. Why? Well, the compounding assumption is hidden from view and in my
experience people tend to forget to set it to the correct assumption. Of course, most people
don't recognize a wrong answer when they get one, so they blithely forge ahead. To fix this
problem press
and then
(clear all). You should see 1 p_yr on the screen. Problem solved. Now, just
Shift
Shift
and finally
PMT .
make sure that you always enter the total number of periods (not necessarily years) into
the per period interest rate into
I/YR ,
N,
PMT .
One other adjustment is important. By default the 10BII displays only two decimal places.
This is not enough. Personally, I like to see five decimal places, but you may prefer some
other number. To change the display, press
Shift = ,
corresponds to the number of digits you would like to see displayed. I would press
to display 5 decimal places. That's it, the calculator is ready to go.
Shift = 5
If you don't find the answer that you are looking for, please check the FAQ. If it isn't there,
please drop me a note and I'll try to answer the question.
Shift C
all we need to do is enter the numbers into the appropriate keys: 5 into
into
PV .
FV
N,
10 into
I/YR ,
-100
161.05.
A Couple of Notes
1.
Every time value of money problem has either 4 or 5 variables. Of these, you will
always be given 3 or 4 and asked to solve for the other. In this case, we have a 4-variable
problem and were given 3 of them (N, i, and PV) and had to solve for the 4th (FV). To
solve these problems you simply enter the variables that you know in the appropriate
keys and then press the other key to get the answer.
2.
The order in which the numbers are entered does not matter.
3.
When we entered the interest rate, we input 10 rather than 0.10. This is because the
calculator automatically divides any number entered into
I/YR
0.10, the future value would have come out to 100.501 obviously incorrect.
4.
PV
purpose. Most financial calculators (and spreadsheets) follow the Cash Flow Sign
Convention. This is simply a way of keeping the direction of the cash flow straight. Cash
inflows are entered as positive numbers and cash outflows are entered as negative
numbers. In this problem, the $100 was an investment (i.e., a cash outflow) and the
future value of $161.05 would be a cash inflow in five years. Had you entered the $100
as a positive number no harm would have been done, but the answer would have been
returned as a negative number. This would be correct had you borrowed $100 today
(cash inflow) and agreed to repay $161.05 (cash outflow) in five years. Do not change
the sign of a number using
number (e.g., type 100
5.
+/-
+/- ).
We can change any of the variables in this problem without needing to re-enter all of
the data. For example, suppose that we wanted to find out the future value if we left the
money invested for 10 years instead of 5. Simply enter 10 into
FV .
N,
8 into
I/YR ,
FV .
as a positive number because you will be withdrawing that amount in 18 years (it will be a
cash inflow). Now press
PV
and you will see that you need to invest $25,024.90 today in
order to meet your goal. That is a lot of money to invest all at once, but we'll see on the next
page that you can lessen the pain by investing smaller amounts each year.
-1250 into
PV ,
FV .
I/YR
PV ,
FV .
Type 18 into
to find that you need to earn an average of 9.35% per year. Again, if
you get No Solution instead of an answer, it is because you didn't follow the cash flow sign
convention.
Note that in our original problem we assumed that you would earn 8% per year, and found
that you would need to invest about $25,000 to achieve your goal. In this case, though, we
assumed that you started with only $20,000. Therefore, in order to reach the same goal, you
would need to earn a higher interest rate.
When you have solved a problem, always be sure to give the answer a second look and be
sure that it seems likely to be correct. This requires that you understand the calculations that
the calculator is doing and the relationships between the variables. If you don't, you will
quickly learn that if you enter wrong numbers you will get wrong answers. Remember, the
calculator only knows what you tell it, it doesn't know what you really meant.
Please continue on to part II of this tutorial to learn about using the HP 10BII to solve
problems involving annuities and perpetuities.
In the previous section we looked at the basic time value of money keys and how to use them
to calculate present and future value of lump sums. In this section we will take a look at how
to use the HP 10BII to calculate the present and future values of regular annuities and
annuities due.
A regular annuity is a series of equal cash flows occurring at equally spaced time periods. In a
regular annuity, the first cash flow occurs at the end of the first period.
An annuity due is similar to a regular annuity, except that the first cash flow occurs
immediately (at period 0).
Shift C
PV
N,
9 into
I/YR ,
PMT .
to solve for the present value. The answer is -6,417.6577. Again, this is
negative because it represents the amount you would have to pay (cash outflow) to purchase
this annuity.
PV
FV
annual rate of return of 8% per year, how much money would you need to invest at the end of
each year to achieve your goal?
Recall that we previously determined that if you were to make a lump sum investment today,
you would have to invest $25,024.90. That is quite a chunk of change. In this case, saving for
college will be easier because we are going to spread the investment over 18 years, rather
than all at once. (Note that, for now, we are assuming that the first investment will be made
one year from now. In other words, it is a regular annuity.)
Let's enter the data: Type 18 into
N,
8 into
I/YR ,
FV .
Now, press
PMT
and
you will find that you need to invest $2,670.21 per year for the next 18 years to meet your
goal of having $100,000.
I/YR ,
PMT .
-1,000,000 into
Now, press
PV
withdrawals. Assuming that you can live for about a year on the last withdrawal, then you can
afford to live for about another 34.40 years.
Suppose that you are offered an investment that will cost $925 and will pay you interest of
$80 per year for the next 20 years. Furthermore, at the end of the 20 years, the investment
will pay $1,000. If you purchase this investment, what is your compound average annual rate
of return?
Note that in this problem we have a present value ($925), a future value ($1,000), and an
annuity payment ($80 per year). As mentioned above, you need to be especially careful to get
the signs right. In this case, both the annuity payment and the future value will be cash
inflows, so they should be entered as positive numbers. The present value is the cost of the
investment, a cash outflow, so it should be entered as a negative number. If you were to make
a mistake and, say, enter the payment as a negative number, then you will get the wrong
answer. On the other hand, if you were to enter all three with the same sign, then you will get
an error message,
Let's enter the numbers: Type 20 into
press
I/YR
N,
-925 into
PV ,
80 into
PMT ,
FV .
Now,
and you will find that the investment will return an average of 8.81% per year.
This particular problem is an example of solving for the yield to maturity (YTM) of a bond.
(note that the key says BEG/END in orange). The screen will now show BEGIN
at the bottom. Note that nothing will change about how you enter the numbers. The calculator
will simply shift the cash flows for you. Obviously, you will get a different answer.
Let's do the college savings problem again, but this time assuming that you start investing
immediately:
Suppose that you are planning to send your daughter to college in 18 years. Furthermore,
assume that you have determined that you will need $100,000 at that time in order to pay for
tuition, room and board, party supplies, etc. If you believe that you can earn an average
annual rate of return of 8% per year, how much money would you need to invest at the
beginning of each year (starting today) to achieve your goal?
As before, enter the data: 18 into
N,
8 into
I/YR ,
FV .
changed is that we are now treating this as an annuity due. So, once you have changed to
Begin Mode, just press
PMT . You
will find that, if you make the first investment today, you
only need to invest $2,472.42. That is about $200 per year less than if you make the first
payment a year from now because of the extra time for your investments to compound.
Be sure to switch back to End Mode after solving the problem. Since you almost always want
to be in End Mode, it is a good idea to get in the habit of switching back. Press
Shift MAR
key.
Calculating the present value of a perpetuity using a formula is easy enough: Just divide the
payment per period by the interest rate per period. In our example, the payment is $1,000 per
year and the interest rate is 9% annually. Therefore, if that was a perpetuity, the present value
would be:
$11,111.11 = 1,000 0.09
If you can't remember that formula, you can "trick" the calculator into getting the correct
answer. The trick involves the fact that the present value of a cash flow far enough into the
future (way into the future) is going to be approximately $0. Therefore, beyond some future
point in time the cash flows no longer add anything to the present value. So, if we specify a
suitably large number of payments, we can get a very close approximation (in the limit it will
be exact) to a perpetuity.
Let's try this with our perpetuity. Enter 500 into
number of periods), 9 into
$11,111.11 as your answer.
I/YR ,
PMT .
PV
Please note that there is no such thing as the future value of a perpetuity because the cash
flows never end (period infinity never arrives).
Please continue on to part III of this tutorial to learn about uneven cash flow streams, net
present value, internal rate of return, and modified internal rate of return.
In the previous section we looked at the basic time value of money keys and how to use them
to calculate present and future value of lump sums and regular annuities. In this section we
will take a look at how to use the HP 10BII to calculate the present and future values of
uneven cash flow streams. We will also see how to calculate net present value (NPV), internal
rate of return (IRR), and the modified internal rate of return (MIRR).
CF
to
Period
Cash Flow
100
200
300
400
500
How much would you be willing to pay for this investment if your required rate of return is
12% per year?
We could solve this problem by finding the present value of each of these cash flows
individually and then summing the results. However, that is the hard way. Instead, we'll use
the cash flow key ( CF ). All we need to do is enter the cash flows exactly as shown in the
j
CF .
j
I/YR
CF ,
j
100
CF ,
j
200
CF ,
Shift NPV .
300
CF ,
j
400
PV . N
is 5 and
I/YR
FV
C)
future value is $1,762.65753. Pretty easy, huh? (Ok, at least its easier than adding up the
future values of each of the individual cash flows.)
To solve this problem we must not only tell the calculator about the annual cash flows, but
also the cost. Generally speaking, you'll pay for an investment before you can receive its
benefits so the cost (initial outlay) is said to occur at time period 0 (i.e., today). To find the
NPV or IRR, first clear the financial keys and then enter -800 into
CF ,
j
remaining cash flows exactly as before. For the NPV we must supply a discount rate, so enter
12 into
I/YR
Shift PRC
Shift
Calculate the total present value of each of the cash flows, starting from
period 1 (leave out the initial outlay). Use the calculator's NPV function just
like we did in Example 3, above. Use the reinvestment rate as your discount
rate to find the present value.
2.
Calculate the future value as of the end of the project life of the present
value from step 1. The interest rate that you will use to find the future value
is the reinvestment rate.
3.
Finally, find the discount rate that equates the initial cost of the
investment with the future value of the cash flows. This discount rate is the
MIRR, and it can be interpreted as the compound average annual rate of
return that you will earn on an investment if you reinvest the cash flows at
the reinvestment rate.
Suppose that you were offered the investment in Example 3 at a cost of $800. What is the
MIRR if the reinvestment rate is 10% per year?
Let's go through our algorithm step-by-step:
1.
The present value of the cash flows can be found as in Example 3. Clear
the TVM keys and then enter the cash flows (remember that we are ignoring
the cost of the investment at this point): press Shift C to clear the cash flow
keys. Now, press 0 then CF , 100 CF , 200 CF , 300 CF , 400 CF , and finally
j
500 CF . Now, enter 10 into the I/YR key and then press Shift NPV . We find
j
To find the future value of the cash flows, enter -1,065.26 into PV , 5 into
N , and 10 into I/YR . Now press FV and see that the future value is
$1,715.61.
3.
At this point our problem has been transformed into an $800 investment
with a lump sum cash flow of $1,715.61 at period 5. The MIRR is the discount
rate (I/YR) that equates these two numbers. Enter -800 into PV and then
press I/YR . The MIRR is 16.48% per year.
So, we have determined that our project is acceptable at a cost of $800. It has a positive NPV,
the IRR is greater than our 12% required return, and the MIRR is also greater than our 12%
required return.
Please continue on to the next page to learn how to solve problems involving non-annual
periods.
Many, perhaps most, time value of money problems in the real world involve other than
annual time periods. For example, most consumer loans (e.g., mortgages, car loans, credit
cards, etc) require monthly payments. All of the examples in the previous pages have used
annual time periods for simplicity. On this page, I'll show you how easy it is to deal with nonannual problems.
General Considerations
The first thing to understand is that all of the principles that you have learned to apply for
annual problems still apply for non-annual problems. In truth, nothing has changed at all. If
you try to think in terms of "periods" rather than years, you will be ahead of the game. A
period can be any amount of time. Most common would be daily, monthly, quarterly,
semiannually, or annually. However, a time period could be any imaginable amount of time
(e.g., seven weeks, hourly, three days).
The first, and most important, thing to think about when dealing with non-annual periods is
the number of periods in a year. The reason that this is so important is because you must be
consistent when entering data into the HP 10BII. The numbers entered into the
PMT
N , I/YR
and
keys must agree as to the length of the time periods being used. So, if you are working
PMT
I/YR
An Example
Very often in a problem, you are given annual numbers but then told that "payments are made
on a monthly basis," or that "interest is compounded daily." In these cases, you must adjust
the numbers given in the problem. Let's look at an example:
You are considering the purchase of a new home for $250,000. Your banker has informed you
that they are willing to offer you a 30-year, fixed rate loan at 7% with monthly payments. If
you borrow the entire $250,000, what is the required monthly payment?
Notice that we are told that the loan term is 30 years and the interest rate is 7% per year (that
is implied, not explicitly stated). So, you might be forgiven for expecting that a period is one
year. However, on further reading you see that the payments must be made every month.
Therefore, the length of a period is one month, and you must convert the variables to a
monthly basis in order to get the correct answer.
Since there are 12 months in a year, we calculate the total number of periods by multiplying
30 years by 12 months per year. So, N is 360 months, not 30 years. Similarly, the interest rate
is found by dividing the 7% annual rate by 12 to get 0.5833% per month. Note that we do not
make any adjustments to the PV ($250,000) because it occurs at a single point in time, not
repeatedly. The same logic would apply if there was an FV in this problem. When you solve
for the payment, the calculator will automatically give you the monthly (per period to be
exact) payment amount.
In this problem, then, we would solve for the payment amount by entering 360 in
into
I/YR ,
PV .
PMT
N,
0.5833
is $1,663.26.
One thing to be careful about is rounding. For example, when calculating the monthly interest
rate, you should do the calculation in the calculator and then immediately press the
I/YR
key.
Do not do the calculation and then write down the answer for later entry. If you do, you will
be truncating the interest rate to the number of decimal places that are shown on the screen,
and your answer will suffer from the rounding. The difference may not be more than a few
pennies, but every penny matters. Try sending your lender a payment that is consistently three
cents less than required and see what happens. It probably won't be long before you get a
nasty letter.
N,
7 into
I/YR ,
PV .
PMT ,
you
will find that the annual payment would be $20,146.60. However, you have to make monthly
payments so if we divide that by 12 we get a monthly payment of $1,678.88.
Do you see the problem? If you do the problem this way, you get an answer that is $15.63 too
high every month. So, when you make the adjustments matters. Always adjust your variables
before solving the problem. The reason for the difference is the compounding of interest. If
you have read through my tutorial on the Mathematics of Time Value of Money, then you
know that the more frequently interest is compounded, the smaller the payment has to be in
order to grow to a particular future value.
PMT
key you will notice that the second function of this key is P/YR, which means
"payments per year." If you set this value to, say, 12 then the calculator will assume monthly
compounding and adjust the interest rate appropriately. However, and this is very important,
it will not adjust the number of periods or the payment amount! That makes this feature
virtually worthless.
Let's do the problem again, but using this "feature." First, set the payments per year to 12
(monthly) by pressing: 12
Shift PMT .
PMT
I/YR ,
PV .
The answer is correct, but what did you save by using that "shortcut?" Nothing at all. In fact,
it takes an extra keystroke or two to use this feature. Furthermore, if you forget to change the
setting when you do the next problem, you will get the wrong answer unless that problem
also happens to use monthly compounding.
My recommendation is to follow the simple steps that I outlined above: Set P/YR to 1 and
then forget about it forever. Always make
per period, and
PMT
I/YR