Interest rates, Two types of financial problems, Recognizing a tvm problem – HP 10B User Manual
Page 50
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Interest Rates
When you approach a financial problem, it is important to rccogni/e that
the interest rate or rate of return can be described in at least three
different ways:
■ As a periodic rate. This is the rate that is applied to your money from
period to period.
■ As an annual nominal rate. This is the periodic rate multiplied by the
number of periods in a year.
■ As an annual effective rate. This is an annual rate that considers com
pounding.
In the previous example of a $1,000.00 savings account, the periodic rate is
1
/
2
% (per month), quoted as an annual nominal rate of
6
% (I
/2
^
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 arc on
pages 71 through 72.
Two Types of Financial Problems
The financial problems in this manual use compound interest unless
specifically stated as simple interest calculations. Financial problems arc
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
How diagram, the financial problem is a TVM (lime value of money)
problem. There arc five main keys used to solve a TVM problem.
4; Picturing Financial Problems 47