Financial Calculator Tutorials

A Primer on Financial Calculators

The use of financial calculators allows us to work through more realistic (and typically more complicated) types of time value of money (TVM) problems. Due to the use of more "real-world" examples, students are encouraged to work through the problems more thoroughly, without the hindrance of having to manually make all the calculations. The financial calculator aids in the understanding of financial concepts in much the same way as the graphing calculator for students of calculus.

You must realize, however, that you cannot use a financial calculator if you do not understand the fundamental concepts of the time value of money. In fact, it is very easy to royally screw up a problem with a financial calculator if you do not know what you are doing. There are common mistakes students tend to make when first using financial calculators. There are also tips that will simplify your introduction to financial calculators. Before discussing either of these we can first review some of the basic features of financial calculators.

It is recommended that you use either the Hewlett Packard 10BII or the Texas Instruments BA-II Plus. If you already have a TI-83 or TI-83-Plus from a previous math class, these are also sufficient. There are more expensive financial calculators with a few more bells and whistles (HP12C, HP17BII, HP19BII, even models available for use in PDAs, but these are not necessary for the majority of students. There are also some less expensive models (e.g., BA-35 Solar) that will perform some basic TVM calculations; however, these calculators are typically inadequate because they do not handle uneven cash flows nor compute internal rates of return and yields to maturity.

Before you first use your calculator, you will need to make some adjustments to the default settings. You need to make these changes only one time.

  1. Increase the number of decimal places. Your calculator comes from the factory set to two (2) decimal places. This level of rounding can lead to significant errors in many TVM problems. To change these settings with the TI BA-II Plus, press the 2nd key followed by the Format key (the decimal key on the keypad). You will see on the screen DEC= 2.00 along with the word ENTER and the up/down arrow keys). Any time you see these arrow keys, it indicates a sub-menu. You can see other items in the sub-menu by pressing either of the arrow keys. To change to four decimal places, press the 4 key followed by the ENTER key. To change the number of decimal places with the HP 10BII, press the Shift key (the key with the yellow square on it), followed by the DISP key (the = key), followed by the 4 key.
  2. Set your calculator to one (1) payment per year. Your calculator default is 12 payments per year (i.e., monthly payments). Although your calculator can handle many different payment and compounding period combinations, it is best to do these calculations manually when first learning to use your financial calculator. To change this setting on the TI BAII Plus, press the 2nd key followed by the P/Y key (the I/Y key). You will see on the screen P/Y= 12.0000. To change to annual compounding, press the 1 key followed by the ENTER key. If done correctly, your screen should display P/Y= 1.0000. To change this setting on the HP 10BII, press the 1 key followed by the Shift key, followed by the P/Y key (the PMT key). You can check to see if this is done correctly by pressing the Shift key and holding the INPUT key down. While holding the INPUT key down the screen should display 1 P_Yr if done correctly.

On the other hand, there are some things you should do every time you begin a new TVM problem.

  1. Make sure your calculator is set to end of period payments. Both the HP 10BII and TI BAII Plus come with this as the default, but if the letters BGN (BGN indicates beginning of period payments) are anywhere on your display screen this will have to be changed. I recommend that novice users never use the "begin" mode as you can solve beginning of period TVM problems very easily without changing this setting.
  2. Set up time lines when examining complex TVM problems. This will assist you with your calculator inputs.
  3. When beginning a TVM problem, always clear out the time value of money registers. If you do not do this every time, it is possible that a number stored in memory from a previously worked problem will cause you to compute an erroneous answer. With the TI BAII Plus press 2nd then CLR TVM (the FV key) to clear the time value of money. With the HP 10BII press Shift followed by CLEAR ALL (the INPUT key).
  4. Enter interest rates (or growth rates or required rates of return, etc.) as a percent, not as a decimal. In other words, enter a 7.5% interest rate as 7.5, not 0.075. Your calculator will know this is an interest rate when you press the I/Y key.
  5. When computing periodic interest rates, do not re-enter the result by hand in your calculator. For example, suppose you are working a problem with a 10% stated annual rate of interest and monthly compounding. The periodic rate is found by dividing 10 by 12 = 0.8333 on the calculator. When you complete this calculation, simply press the I/Y key. This will enter the full number (out to 13 decimal places instead of the rounded 0.8333) in the TVM register and thereby minimize rounding error.
  6. Enter cash outflows as a negative number. Most financial calculators require you to give information as to the direction of the cash flow. Inflows are positive numbers and outflows are negative numbers. If you fail to do this, the HP 10BII and TI BAII Plus will give error messages on some TVM (but not all) problems. For example, if you were to work a problem where you had deposited $1,000 into an account today, that represents an outflow to you. You should enter that number as a negative by entering 1000 followed by the +/- key, followed by the PV key.

The following tutorials assume that you already understand the fundamentals (math and terminology) of the time value of money. Also, they only deal with time value of money calculations -- not any of the other functions of your calculator.

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This page last updated on Tuesday, January 17, 2006.