Future Value of a Single Sum

d) Monthly Compounding 5 x 12 = 60 & N N=60 5 12 = 0.4167 & I/Y I/Y=0.4167 1000 & +/- & PV PV = -1,000 0 &PMT PMT = 0 CPT&FV FV = 1,283.36

e) Continuous Compounding = 0.05x5 = 0.25 & = 1,284.03 NOTE: At any time to clear Time Value of Money (TVM) worksheet press 2nd& FV. (CLR TVM above FV stands for Clear Time Value of Money) N: Number of periods I/Y: Compounding rate of return per period PV: Present Value PMT: Payments (Inflows/Outflows) FV: Future Value at the end of N periods CPT: Compute 2nd: Shift/ Second function key Example 1: Calculate the Future value of a $1,000 investment at the end of five years, if it earns 5% rate of return. Assuming: a) Annual Compounding. b) Semi-Annually Compounding c) Quarterly Compounding. d) Monthly Compounding. e) Continuous Compounding. Solution: a) Annual Compounding 5 & N N=5 5 & I/Y I/Y = 5 1000 & +/ & PV PV = 1,000 0 &PMT PMT = 0 CPT&FV FV = 1,276.28 N: Number of periods I/Y: Discount rate per period PV: Present Value at Time 0 PMT: Payments (Inflows/Outflows) FV: Future Value at the end of N periods CPT: Compute 2nd: Shift/Second function key Example 1: Calculate the Present value of a $1,000 cash flow to be received at the end of 5 years given a discount rate of 5%. Assuming: f) Annual Discounting. g) Semi-Annually Discounting. h) Quarterly Discounting. i) Monthly Discounting. j) Continuous Discounting. Solution: 5 x 4 = 20 & N N=20 5 4 = 1.25 & I/Y I/Y=1.25 1000 & +/- & PV PV = -1,000 0 &PMT PMT = 0 CPT&FV FV = 1,282.04 f) Annual Compounding 5 & N N=5 5 & I/Y I/Y = 5 1000 &FV FV = 1,000 0 &PMT PMT = 0 CPT& PV PV = 783.53 Present Value of a Single Sum 2nd& LN e0.05x 5 1.2840 x 1,000

b) Semi-Annual Compounding 5 x 2 = 10 & N N=10 5 2 = 2.5 & I/Y I/Y=2.5 1,000 & +/- & PV PV = -1,000 0 &PMT PMT = 0 CPT&FV FV = 1,280.08

c) Quarterly Compounding

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g) Semi-Annual Compounding 5 x 2 = 10 & N N=10 5 2 = 2.5 & I/Y I/Y=2.5 1000 &FV FV = 1,000 0 &PMT PMT = 0 CPT& PV PV = 781.20

Example: Calculate the Future value of an ordinary annuity that pays $1,000 at the end of each of next 5 years. Investment is expected to earn 5% return. 5 & N N=5 5 & I/Y I/Y = 5 1,000 &PMT PMT = 1,000 0 & PV PV = 0 CPT&FV FV = - 5,525.63 Present Value of and Ordinary Annuity Example: Calculate the Present value of an ordinary annuity that pays $1,000 at the end of each of next 5 years. Investment is expected to earn 5% return. 5 & N N=5 5 & I/Y I/Y = 5 1,000 &PMT PMT = 1,000 0 &FV FV = 0 CPT& PV PV = - 4,329.48 Future Value of and Annuity Due

h) Quarterly Compounding 5 x 4 = 20 & N N=20 5 4 = 1.25 & I/Y I/Y=1.25 1000 &FV FV = 1,000 0 &PMT PMT = 0 CPT&FV FV = 780.01

i) Monthly Compounding 5 x 12 = 60 & N N=60 5 12 = 0.4167 & I/Y I/Y=0.4167 1000 & +/- & PV PV = -1,000 0 &PMT PMT = 0 CPT&FV FV = - 779.21

j) Continuous Compounding = 0.05& +/- &x5 = 0.25 & 2nd& LN e-0.05x 50.7788 x 1,000 = 778.80

Future Value of an Ordinary Annuity.

2nd: Shift Key N: Number of periods I/Y: Compound rate per period PV: Present Value at Time T=0 PMT: Annuity Payments (Inflows/Outflows) FV: Future Value at the end of N periods CPT: Compute Method # 1 Switch the calculation mode of the calculator from ENDING to BEGINNING. The default mode of calculator is ENDING. To switch: Press 2nd& PMT (above PMT, BGN is written which stands for Beginning Mode), END will display on screen. Now press 2nd& ENTER (above ENTER, SET is written) BGN will display on screen. Now your calculator is running in BEGINNING mode.

N: Number of periods I/Y: Discount/Compound rate per period PV: Present Value at Time T=0 PMT: Annuity Payments (Inflows/Outflows) FV: Future Value at the end of N periods CPT: Compute

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Example: Calculate the Future value of an annuity due that pays $1,000 at the beginning of each of next 5 years. Investment is expected to earn 5% return. 5 & N N=5 5 & I/Y I/Y = 5 1,000 &PMT PMT = 1,000 0 & PV PV = 0 CPT&FV FV = 5,801.91

Method # 1 Switch the calculation mode of the calculator from ENDING to BEGINNING. The default mode of calculator is ENDING. To switch: Press 2nd& PMT (above PMT, BGN is written which stands for Beginning Mode), END will display on screen. Now press 2nd& ENTER (above ENTER, SET is written) BGN will display on screen. Now your calculator is running in BEGINNING mode. Example: Calculate the Present value of an annuity due that pays $1,000 at the beginning of each of next 5 years. Investment is expected to earn 5% return. 5 & N N=5 5 & I/Y I/Y = 5 1,000 &PMT PMT = 1,000 0 &FV FV = 0 CPT& PV PV = - 4,545.95

Method # 2 Keep the calculator in ENDING mode & sole the problem assuming ordinary annuity. At the end simply use the following formula: = (1 + / )

Example: Calculate the Future value of an Annuity Due that pays $1,000 at the beginning of each of next 5 years. Investment is expected to earn 5% return. 5 & N N=5 5 & I/Y I/Y = 5 1,000 &PMT PMT = 1,000 0 & PV PV = 0 CPT&FV FV = 5,525.63 = 5,525.63 1 + 0.05 = 5,801.91 NOTE: Both methods result in same Future value. Present Value of an Annuity Due

Method # 2 Keep the calculator in ENDING mode & solve the problem assuming Ordinary Annuity. At the end simply use the following formula: = Example: Calculate the Future value of an annuity due that pays $1,000 at the beginning of each of next 5 years. Investment is expected to earn 5% return. 5 & N N=5 Yea 1,000 &PMT PMT = 1,000 0 &FV FV = 0 CPT& PV PV = 4,329.48 = 4,329.48 1 + 0.05 = 4,545.95 NOTE: Both methods result in same Present value. (1 + / )

2nd: Shift Key N: Number of periods I/Y: Discount rate per period PV: Present Value at Time 0 PMT: Annuity Payments (Inflows/Outflows) FV: Future Value at the end of N periods CPT: Compute

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Present Value of An Unequal Stream of Cash Flows

Particular

Description flow Year 4

Calculation Keys

Press NPV I NPV

Net Present Value Discount rate Down Arrow Net Present Value Press CPT 1,846.5269 10 & ENTER

Present value of Cash Flows Future Value: CF: Cash Flow worksheet NPV: Net Present Value CPT: Compute 2nd: Shift key CE/C: Clear error / Clear Example: Calculate the Present value of the following stream of cash flows assuming 10% discount rate. Year 1 2 3 4 Cash Flows $500 800 700 300

4 & N N=4 10 & I/Y I/Y = 10 1846.5269 & +/- & PV PV = -1,846.5269 0 &PMT PMT = 0 CPT&FV FV = 2,703.50 Amortizing Schedule

Press CF Cash Flow Worksheet will open Particular CFo C01 F01 CF2 F02 CF3 F03 CF4 F04 Description Cash flow for year 0 Down Arrow Cash flow for year 1 Down Arrow Frequency of Cash flow in Year 1 Cash flow for year 2 Down Arrow Frequency of Cash flow in Year 2 Cash flow for year 3 Down Arrow Frequency of Cash flow in Year 3 Cash flow for year 4 Down Arrow Frequency of Cash 1 (Skip) 1 (Skip) 300 & ENTER 1 (Skip) 700 & ENTER 1 (Skip) 800 & ENTER 500 & ENTER Calculation Keys 0 & ENTER

N: Number of periods I/Y: Interest rate per period PV: Present Value PMT: Payments FV: Future Value at the end of N periods 2nd: Shift key Example: Loan Amount: $ 15,000 Period; 5 years Interest rate: 12% 5 & N N=5 12 & I/Y I/Y = 5 15000 & +/- & PV PV = -15,000 0 &FV FV = 0 CPT&PMT PMT = 4,161.15 2nd& PV P1: Starting Period; 1 & ENTER P2: Ending Period;1 & ENTER BAL: Ending Balance; BAL= 12,638.85 PRN: Principal paid; PRN = 2,361.15 INT: Interest paid; INT = 1,800.00& so on.

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Net Present Value &IRR

Calculating Yield (YTM)

CF: Cash Flow worksheet NPV: Net Present Value IRR: Internal Rate of Return CPT: Compute 2nd: Shift key CE/C: Clear error / Clear Example: Calculate the NPV of a project with an initial outlay of $2.5 million and cash inflows of $0.8 million in Years 1, $1.4 million in Year 2 and $ 1.8 million in Year 3 assuming a discount rate of 15%. CF Cash Flow Worksheet will open Particular CF0 C01 F01 C02 F02 C03 F03 Press NPV I NPV Description Cash flow for year 0 Down Arrow Cash flow for year 1 Down Arrow Frequency of Cash flow Year 1 Cash flow for year 2 Down Arrow Frequency of Cash flow Year 2 Cash flow for year 3 Down Arrow Frequency of Cash flow Year 3 Net Present Value Discount rate Down Arrow Net Present Value Press CPT 0.4378 million 23.99% 15& ENTER 1 (Skip) 1 (Skip) 1.8& ENTER 1 (Skip) 1.4& ENTER 0.8& ENTER Calculation Keys - 2.5& ENTER

N: Number of periods I/Y: YTM PV: Present Value PMT: Payments (Inflows/Outflows) FV: Future Value at the end of N periods CPT: Compute 2nd: Shift/ Second function key Example 1: Calculate YTM of a 6%, 5 year bond with a face value of $1,000 currently selling for $960. Assuming coupons are paid: a) Annually. b) Semi-Annually. c) Quarterly. Solution: a) Annually 5 & N N=5 960 & +/- & PV PV = -960 60 &PMT PMT = 60 1,000 &FV FV = 1,000 CPT& I/Y I/Y = 6.97%

b) Semi-Annually 5 x 2 & N N=10 960 & +/- & PV PV = -960 60 2 &PMT PMT = 30 1,000 &FV FV = 1,000 I/Y I/Y = 3.48% x 2 = 6.96%

c) Quarterly 5 x 4 & N N=20 960 & +/& PV PV = 960 60 4 &PMT PMT = 15 1000 &FV FV = 1,000 I/Y I/Y = 1.74% x 4 = 6.95%

Net Present Value Press IRR and then CPT

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Conversion between BEY&EAY

Particular

Description Down Arrow EAY

Calculation Keys

EFF

Press CPT 5.06%

Effective Annual Yield NOTE: At any time to clear press 2nd& CE/C. Depreciation

CPT: Compute 2nd: Shift/ Second function key Example 1: Calculate BEY of an annual coupon bond trading at YTM of 6%. Solution: 2nd& 2 Particular NOM EFF C/Y NOM BEY Down Arrow EAY Down Arrow Compounding per Year Down Arrow BEY Press CPT 5.91% 2 & ENTER 6 & ENTER Description Calculation Keys 2nd: Shift key CE/C: Clear error / Clear a) Straight-line method: Example: Cost of the Asset = $500,000 Salvage Value = $50,000 Life of Asset = 5 years 2nd& 4 Particular SL LIF M01 Description BEY Down Arrow EAY Down Arrow C/Y NOM Compounding per Year Down Arrow BEY 2 & ENTER Calculation Keys 5 & ENTER CST SAL YR DEP RBV Description Straight Line Down Arrow Life of the Asset Down Arrow Starting Month Down Arrow Cost of the Asset Down Arrow Salvage Value Down Arrow Computing Year Down Arrow Depreciation Down Arrow Remaining Book Value 410,000 90,000 1 & ENTER 50000& ENTER 500000 & ENTER 5& ENTER Calculation Keys

Bond-equivalent Yield Example 2:

Calculate EAY of a semi-annual coupon bond trading at YTM of 5%. Solution: 2nd& 2

Particular NOM EFF

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Particular RDV &so on

Description Remaining Depreciable Value

Calculation Keys 360,000

How to store data

b) Declining Balance method: Example (Double-Declining Method): Cost of the Asset = $500,000 Salvage Value = $50,000 Life of Asset = 5 years 2nd& 4 Particular SL 2nd& SYD 2nd& Enter DB LIF M01 CST SAL YR DEP RBV RDV &so on NOTE: At any time to clear press 2nd& CE/C. Declining Balance Method Down Arrow Life of the Asset Down Arrow Starting Month Down Arrow Cost of the Asset Down Arrow Salvage Value Down Arrow Computing Year Down Arrow Depreciation Down Arrow Remaining Book Value Remaining Depreciable Value 300,000 250,000 200,000 1 & ENTER 50000 & ENTER 500000 & ENTER 5 & ENTER 200 & ENTER Enter Sum-of-the-year digit method Description Straight Line Calculation Keys

STO: Store RCL: Recall There are 10 storage fields (0 9) Press the number you want to store e.g. 20 Press STO& 1 The number 20 is now store at place 1. To recall press RCL& 1.