Module 3

Introduction to the Time

Value of Money

David Mannaioni CPCU, CLU, ChFC, CFP®

7483
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
This publication may not be duplicated in any way without the express written consent of the publisher. The
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PLANNER™, and CFP (with flame logo)® marks. CFP® certification is granted solely by Certified Financial
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such as this CFP Board-Registered Program, have met its ethics, experience, and examination requirements.
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FINANCIAL PLANNER™, and federally registered CFP (with flame logo)®, which it awards to individuals who
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At the College’s discretion, news, updates, and information regarding changes/updates to courses or
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Table of Contents
Study Plan/Syllabus ................................................................ 1
Learning Activities ............................................................. 3
Chapter 1: The Importance of the Time Value of Money ...... 5
Chapter 2: Fundamental Calculator Keystrokes ................. 12
Common Calculator Mistakes ........................................... 12
Using the Hewlett-Packard 10BII+ Calculator ................... 15
Using the Hewlett-Packard 12C Calculator ....................... 18
Chapter 3: Basic Time Value of Money Calculations .......... 22
Capitalization of a Number ............................................... 22
Future Value of a Single Sum ........................................... 23
Present Value of a Single Sum .......................................... 25
Number of Compounding Periods and Interest Rate per
Compounding Period ........................................................ 27
Present Value of an Annuity ............................................. 31
Future Value of an Annuity ............................................... 32
Periodic Payment or Receipt ............................................. 34
Chapter 4: Intermediate Time Value of Money
Calculations ...................................................................... 38
Serial Payments ................................................................ 38
Calculations Involving Single Sums Combined with
Annuities .......................................................................... 47
Chapter 5: Advanced Time Value of Money Calculations ... 53
Calculations Involving Unequal Cash Flows ..................... 53
Squares, Square Roots, and Nth Roots .............................. 59
 Amortization ..................................................................... 60
Summary ................................................................................ 62
Module Review ...................................................................... 64
Questions .......................................................................... 66
Answers ............................................................................ 90
References ............................................................................ 136
About the Author ................................................................. 137
Index .................................................................................... 138
Study Plan/Syllabus

O
ne of the many functions of a personal financial planner is to make
appropriate recommendations to clients. The planner must understand
that the value of money changes over time, and the changes affect the
recommendations that are made.

Even if the inflation rate is zero, a dollar received in the future is worth less than
a dollar received today, just as an obligation to pay a dollar in the future is less
costly than paying a dollar today. This is because a dollar invested wisely will
provide some expected positive return. For example, if 100 years ago $100 were
invested in an account bearing 10% interest, compounded annually, it would be
worth more than $1.3 million today. The compounding (or discounting) of
money based on interest is the dynamic force behind the time value of money
concept.

This module illustrates how to calculate the following time value of money
variables:

 the future value of a single sum or annuity,

 the present value of a single sum or annuity,

 the interest rate per compounding period,

 the number of compounding periods,

 the periodic payment,

 the serial payment (or inflation-adjusted payment),

 the present value of serial payments, and

 the future value of serial payments.

This module also covers the capitalized value of a specific dollar amount.

Study Plan/Syllabus  1
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
The chapters in this module include:

The Importance of the Time Value of Money

Fundamental Calculator Keystrokes

Basic Time Value of Money Calculations

Intermediate Time Value of Money Calculations

Advanced Time Value of Money Calculations*

*Note: Material in the Advanced Time Value of Money Calculations chapter will be tested in the
Investment Planning course, not in this course.

This module focuses on the time value of money (TVM) concepts and
applications, including the specific application of TVM principles to life
insurance needs. Understanding TVM concepts is more important than knowing
which buttons to push on a calculator. In fact, learning the concepts will make it
easy to know which buttons to push. Competent financial planning requires
knowledge of TVM concepts as well as the ability to communicate them to
clients.

Upon successful completion of this module, you will be able to solve time
value of money problems, as well as be able to explain how the variables in a
time value of money problem interact.

2  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Learning Activities
Learning Activities
Module Review
Learning Objective Readings Questions
3–1 Calculate the capitalized Module 3, 1, 2
value of a given income.
Chapter 2:
Fundamental
Calculator Keystrokes

Chapter 3: Basic Time

Value of Money
Calculations

3–2 Calculate the future value Module 3, 3–13

for a given situation.
Chapter 3: Basic Time
Value of Money
Calculations

3–3 Calculate the present value Module 3, 14–28

for a given situation.
Chapter 3: Basic Time
Value of Money
Calculations

3–4 Calculate the number of Module 3, 29–33

compounding periods for a
given situation. Chapter 3: Basic Time
Value of Money
Calculations

3–5 Calculate the interest rate Module 3, 34–39

per compounding period for
a given situation. Chapter 3: Basic Time
Value of Money
Calculations

3–6 Calculate the periodic Module 3, 40–47

payment for a given
situation. Chapter 3: Basic Time
Value of Money
Calculations

Study Plan/Syllabus  3
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Learning Activities
Module Review
Learning Objective Readings Questions
3–7 Calculate the present value Module 3, 48–54
for an inflation-adjusted
payment. Chapter 4:
Intermediate Time
Value of Money
Calculations

3–8 Calculate the inflation- Module 3, 55–59

adjusted payment for a
future sum. Chapter 4:
Intermediate Time
Value of Money
Calculations

3–9 Determine the general result Module 3, 60–64

when one parameter in a
time value of money Chapter 4:
calculation is changed. Intermediate Time
Value of Money
Calculations

Chapter 5: Advanced
Time Value of Money
Calculations
(optional)

4  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Chapter 1: The Importance of the
Time Value of Money

T
oday, most planners use computer software that can model a wide variety
of assumptions, and you can have such software complete all of the
calculations that will be covered in this course. You may wonder why
you need to learn the keystrokes for these calculations, and that is a valid
question.

In a perfect world, clients would know what they want to accomplish, the
appropriate interest rate, funds available, and time frames, and their assumptions
would all be realistic. That seldom happens. Clients enter your office and they
have no idea whether their goals are achievable. Part of your job in defining the
scope of engagement is to define a client’s goals, and you must also let clients
know when their goals are unrealistic. How do you evaluate whether a goal is
realistic before you have done analysis? One of the reasons planners learn to love
their calculator is that you can do some rough estimates in a short amount of time
that can help you set realistic goals.

Imagine that clients enter your office and want to save for their child’s college
education. They don’t know what college costs, they haven’t started saving, and
they have no idea what they need to save per month. If you are comfortable with
the calculator, you can easily walk them through the discussion by providing the
clients those estimates. The conversation may go like this.

Planner: Have you thought about the type of college you may want to send
your child to and how much it will cost?

Client: Well, we are thinking an in-state school because of costs but we

haven’t gone much past that. I think I heard that college was around $20,000
a year last year for costs including room and board. Does that sound right?

Planner: We can certainly look up the various costs for in-state schools, but
since your son is 5, I think that is a reasonable starting point. In addition to

Chapter 1: The Importance of the Time Value of Money  5

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 setting a target amount to accumulate, in order to figure out how much you
need to save, we need to set an inflation rate. I happen to know that college
costs have increased at about twice the inflation rate for the last several
years. With inflation running about 2.25%, that means we would increase
college costs around 4.5%. Obviously that makes it more expensive in the
future, but it helps give you a sense of what it might cost. Are you okay with
my using 4.5% for college inflation?

Client: Sure

Planner: Well, if I project that forward, instead of 20,000 per year that
would require $35,444 for that first year. How much you are earning on the
money invested during those four years would impact the calculation. I think
assuming just a 5.5% return would be safe. If you did that you would need
$139,773 at the start of college to provide that income. Let’s just round that
to $140,000. Does that amount surprise you?

Client: Wow! That sounds like a lot. What would we have to be saving to
reach that goal?

Planner: Let’s see. If we use a 5.5% return, it would require $616.48 or

around $620 per month. It could be less if we increase the amount you are
saving each year by inflation. I know you said this is important to you. Does
this sound like something you could commit to?

Client: I know you mentioned there were some other things we might need
to be doing, so I’m not sure exactly. I know that we have this mutual fund
that is worth around $20,000 and we have been putting $150 into it each
month. If we put the $20,000 and that $150 per month toward the college
fund, how much more would we need to save?

Planner: Okay $20,000 today at 5.5% with $150 a month being invested will
grow to $74,881. Let’s just say $75,000, and you needed around $140,000.
Because you have save that amount and are already committing the $150,
you only need to come up with an additional $65,000, which means monthly
savings of $286—close to $300. I round these numbers because we don’t

6  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 really know the exact return or inflation, but if you can save this amount, we
should be on a good path and can keep adjusting the amounts as we go. Do
you think you could find $300 to put toward this goal or should we talk about
possibly reducing the goal?

Client: I think we can pull off $300. Of course, it depends on what else you
tell us we’ll need to do.

Planner: Well, we will keep working through the issue and identifying
solutions and put a plan together that works for you, but I am going to use
these assumptions as I work through your plan, okay?

In this conversation, you utilized the following learning objectives:

3–2 Calculate the future value for a given situation.

3–3 Calculate the present value for a given situation.

3–6 Calculate the periodic payment for a given situation.

3–7 Calculate the present value for an inflation-adjusted payment.

3–9 Determine the general result when one parameter in a time value of
money calculation is changed.

If you had not been able to use your calculator to do these calculations, you may
have had to spend much more time with the client at a later point. If you waited
for the computer analysis and the client was uncomfortable with the monthly
savings amount or how large the goal was, you would not have discovered it until
you were in the presentation. If you become proficient with the calculator, you
can recalculate your own progress toward retirement during commercials! Using
your calculator is a required skill for both the CFP® Certification Examination
and your life as a financial planner.

The best planning is useless without a financial goal in mind. Time value of
money (TVM) concepts allow you, the planner, to translate goals into dollar

Chapter 1: The Importance of the Time Value of Money  7

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
amounts. Further, these concepts permit you to determine the dollar input
required to achieve the desired results. We recognize that this calculation is the
starting point of a conversation with the client. Other factors may suggest that
more or less be invested but clients need to know that a starting point has some
validity and isn’t just pulled out of the air.

TVM calculations require the client and planner to decide upon an estimated
investment rate of return and an inflation rate to be used. Since these are certain
to be inaccurate for at least some of the years of the planning period, some would
argue that any rule of thumb is just as useful. This argument has some merit, but
every client has a unique set of circumstances and goals. In reality, people are
more likely to follow a plan that is based on their input rather than a rule of
thumb that may or may not be appropriate.

The TVM concept has many applications in financial planning. For instance, it is
used to determine how investment dollars should be applied to best meet
financial objectives. It also is used to help calculate education, survivor, and
retirement needs for a given client and to determine how to best meet those
needs. Additionally, it is used to determine the financial effect of postponing
taxes. In insurance planning, time value of money concepts are used to calculate
life insurance needs.

Of all the concepts that are important to a financial planner, a clear understanding
of TVM calculations is imperative. When working through the problems in this
module, it is critical that a planner endeavor to understand the concepts behind,
and the relationships between the five basic TVM factors: present value [PV],
future value [FV], payment [PMT], interest [I/YR], and number of periods [N].
By understanding the relationships between these factors, most problems may be
figured logically, freeing students from trying to memorize numerous calculator
keystroke sequences.

A financial planner who is unable to understand and explain TVM concepts will
find it difficult to provide the necessary guidance for his or her clients. Insurance
planning, investment planning, income tax planning, retirement planning,
education funding, and estate planning all require the use of these basic concepts

8  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
and calculations. If extra time is necessary for students to master these concepts,
investing that time will prove to be well worth the effort over the long term.

The most efficient, accurate means of performing time value of money

calculations is through the use of financial calculators or computer programs.
Students are required to use financial calculators in completing this CFP
Certification Professional Education Program. However, because it is helpful to
understand the underlying mathematical principles to adequately use the
calculators, the readings for this module include exponential calculation of time
value of money problems.

The College’s modules support the Hewlett-Packard 10BII and 10BII+

calculators, and all primary keystroke instructions refer to these calculators. We
have included some Hewlett-Packard 12C calculator keystrokes for basic time
value of money calculations. We do not provide additional support for the HP
12C or for any calculators other than the HP 10BII+. You can find online
assistance with HP calculators at [Link].

Before doing any problems in this module, you should become familiar with your
calculator by using the owner’s manual that accompanies it. If you are
completing this module using classroom instruction, please consult with your
instructor regarding preferred models before purchasing a calculator.

Note: Although excellent tools in business, programmable calculators with

alpha-numeric keys (letters on the keys) are not allowed into CFP® Certification
Examinations or College for Financial Planning educational examinations due to
exam security issues. Programmable calculators allowing user-entered programs
(e.g., HP 17BII), but without alpha keys are permitted for use on the CFP®
Certification Examination or the College for Financial Planning’s educational
exams. However, due to the same security issues these calculators will be
examined by proctors before entry to exams is granted. If the calculator is found
to contain programming, the student will be barred from taking the exam on the
basis of unethical behavior.

Chapter 1: The Importance of the Time Value of Money  9

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Solving Time Value of Money Problems
In the long run, understanding time value of money concepts is more important
than memorizing calculator keystrokes. In fact, simply memorizing keystrokes
will likely lead to frustration and an inability to accurately answer TVM
problems. As a simple learning aid, use the table below to separate the known
variables from the unknown variable.

N I/YR PV PMT FV
Number of Interest rate Present value Payment Future value
periods per year

For instance, suppose a problem reads as follows. A client wants to invest

$10,000 for five years. If the investment grows at 8% per year, how much will
the investment be worth in five years?

The first step in solving this problem is to identify the known and the unknown
variables. Using the table above, the problem looks like this:

N I/YR PV PMT FV
5 8% $10,000 NA ???

Remember that it is important to understand TVM concepts so that when one

parameter changes, you will have a good idea of what will happen to the
calculation. Understanding the relationship of the inputs is more important than
trying to memorize keystrokes.

Other Calculators

If you are using a calculator such as the HP 12C, where the interest rate on the
calculator is the interest rate per period, use the following table.

N i PV PMT FV
Number of Interest rate Present value Payment Future value
periods per period

10  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Relationships Among the Variables

Over time, original assumptions used by a planner to solve time value of money
problems will change. Clients may receive an unexpected infusion of cash from
an inheritance; inflation may be much less or more than anticipated; market
returns may be different than expected. All of the variables in a TVM problem
can (and most probably will) change.

For this reason it is important for financial advisors to understand the relationship
among the variables. For instance, if an investment earns a greater return than
projected, future deposits toward a given goal can be decreased. Or the goal can
be realized sooner than anticipated. On the other hand, if a payment is missed,
more time may be required to reach the goal. Perhaps a different investment
vehicle with a higher expected rate of return (and thus more risk) will need to be
chosen to meet the goal in the same amount of time.

Chapter 1: The Importance of the Time Value of Money  11

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Chapter 2: Fundamental Calculator
Keystrokes
Common Calculator Mistakes

G
etting the wrong answers is a common and frustrating experience when
learning time value of money calculations. Learning to consider
whether the answer showing on the calculator makes sense before
accepting it is an important skill to develop. Learning what the common mistakes
are and completing a second try when an answer is suspect will help you avoid
missing exam questions or worse, giving clients incorrect information. The
following are some common calculator mistakes that are worth studying to avoid
incorrect answers due to erroneous entries.

 Clearing the display but not the calculator’s memory registers. On most
financial calculators, simply pressing the “clear” [C] key erases only one
number—the one on the calculator’s display screen. The very first step
before starting a calculation should be to clear the calculator’s memory. If
you had been calculating a problem with a payment and the next problem
doesn’t have a payment, it you don’t clear it, the calculator assumes that
same payment and you will get a wrong answer. Many additional numbers
may be stored in the calculator’s memory banks, and the calculator will use
them until you tell it otherwise. Be sure to properly clear all numbers from your
calculator before you work a new problem. To clear all numbers in memory on
the HP 10BII+, press the [SHIFT] key and then the C/[C ALL] key. Most
calculators, including the HP 10BII+, store the numbers even if they are turned
off, so clearing the memory every time you turn on the calculator is a good habit
to get into is.

12  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Note: The manuals of the HP 10B, HP 10BII, and HP 10BII+ calculators call the
[SHIFT] key “gold,” though this key color has been described as orange, copper,
pumpkin, and in some cases green; and on the 10BII+ it is red-orange. The
keystrokes given here refer to that all-important key as the [SHIFT] key,
sometimes identified by the symbols or .

It should also be noted that the HP 10BII and the HP 10BII+ are, for all intents
and purposes, identical with a very few exceptions; the + has increased memory
and offers an additional “blue shift” key that provides for additional bond
calculations (this key will not be required or used during your CFP studies with
the College). The terms [SHIFT] or occasionally [gold] key are used throughout
this material to refer only to the dark reddish-orange key with the downward
pointing arrow on its face as seen in the preceding paragraph.

 Using the default number of compounding periods. Most financial

calculators allow you to preset the number of compounding periods in your
calculator. However, once this default number is set, it works in all
calculations. You must either mentally adjust the variables for problems that
have compounding periods other than the default, or you must use the
calculator’s built-in functions to set the proper number of compounding
periods. Pressing the [SHIFT] key and then holding down the [C ALL] button
shows the current setting for compounding periods per year. If you were
calculating a problem that required 1 compounding period in the prior
question and you are now calculating what would need to be saved on a
monthly basis for accumulating $10,000 FV over 5 years using 6% return,
your answer may come out $1,980.10 rather than $143.33 per month.
Logically you know that $1,980 per month just doesn’t make sense to get to
$10,000 in five years. That is a clue that your compounding period is off.

 Using the wrong payment mode (beginning or end). Identify whether the
first payment occurs at the beginning or end of the first compounding period.
Set your calculator accordingly for each new problem. Begin or End modes
are a necessary and important consideration only when a payment [PMT] is
involved in the calculation. Students get confused with when to use
beginning and end. You may find it easy to think that you’d prefer to PAY a

Chapter 2: Fundamental Calculator Keystrokes  13

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 bill at the end of the month but would rather GET your full paycheck at the
beginning of the month. Generally, word problems have to do with this.
When is tuition due? At the beginning. When do you want to receive
income? At the beginning. Make sure you carefully read the question and
know what they are asking for.

 Entering a rounded number. Answers may vary slightly due to this factor.
To minimize any rounding errors when using the financial calculator,
especially following the calculation of an adjusted interest rate (Chapter 4),
enter the calculated interest rate immediately after calculating it. To do this,
press the [i] or [I/YR] key, as appropriate for the calculator being used.
Regardless of the number of digits shown on the screen of the HP 10BII+,
the calculator will store a 12-digit number. Doing the step above will yield
the most accurate answer. If that is inconvenient, always use the interest rate
carried out to at least four places to the right of the decimal point.

 Helpful Hints With Calculators

 PV = beginning value (one time lump sum)

 FV = ending value

 N = number of compounding periods (this variable is not always in

years; it also can be weeks, months, quarters, etc.)

 I/YR = interest rate per year with the HP 10BII+ (for some calculators,
“i” represents the interest rate per compounding period—again, not
necessarily the interest rate per year)

 PMT = payment (amount being put in repeatedly)

14  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Using the Hewlett-Packard 10BII+ Calculator
Most financial services professionals use financial calculators or computers
rather than tables and exponential calculations because of the speed, ease, and
accuracy afforded by calculators. Students in the CFP Certification Professional
Education Program are required to use a financial calculator for the national
examination. This chapter presents basic instructions for using the Hewlett-
Packard 10BII+ calculator in computing answers to time value of money
problems. However, these instructions should be used only to supplement the
owner’s manual provided with the calculator, not to replace it. Before discussing
the specific keystrokes used to calculate TVM problems, some basic instructions
for calculator usage are presented below.

1. The HP 10BII+ has a method for accommodating more functions on its

keyboard than there are keys. Most keys have more than one job. The
additional functions are written above or below the keys in orange or blue,
and they are accessed in a manner similar to creating capital letters on a
keyboard, where a shift key is depressed. Most secondary TVM functions on
the calculator use the [SHIFT] key (you may see the color as red-orange with
a downward pointing arrow, or similar, but it will generally be identified as
the [SHIFT] key in these materials). To access a key’s alternate function,
press the [SHIFT] key (on the far left column, third from the bottom row of
the keyboard), then press the desired key. (Unlike using a keyboard, a
financial calculator does not need the [SHIFT] key to be held down while the
desired key is pressed; it is pressed prior to the desired key.) For example,
“OFF” is a second function of the “ON” key on the 10BII+. To turn off the
calculator, press the [SHIFT] key, then press the [ON] key. The owner’s
manual shows this procedure as follows: [gold], [OFF].

2. The HP 10BII+ calculator must be cleared before every problem. There are
procedures for clearing all registers and for clearing only some of the
registers. Especially when learning how to use the calculator to perform
TVM calculations, it is preferable to clear all storage before every problem.

Chapter 2: Fundamental Calculator Keystrokes  15

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 The following keystroke sequence is used to clear the HP 10BII+: [SHIFT],
[C ALL].

3. The following HP 10BII+ keys are used for basic TVM calculations:

Key Use
denotes number of compounding periods per year (accessed
through [SHIFT] key)
denotes present value (i.e., value before compounding takes place,
or after discounting)
denotes future value (i.e., value after compounding takes place, or
before discounting)
denotes periodic payment
denotes annual interest rate (Interest per Year)
denotes total number of compounding periods (not necessarily
years)
changes an entered number from a positive to a negative. Utilize
this key AFTER you enter your number.
automatically multiplies the number of years by the number of
compounding periods per year to arrive at the total number of
compounding periods (accessed through [SHIFT] key)
/ used to program calculator for either an OA - ordinary annuity or
an AD - annuity due (accessed through [SHIFT] key). The
calculator shows no display message if it is set for an ordinary
annuity calculation (payments at the end of the period); however,
the display will show the letters “BEG” (lower central region) if it is
set for an annuity due. This key toggles between the two options.

4. The calculator always uses the last number entered into a register for a
calculation. For example, entering 1,200 and then PV enters 1,200 into the
PV register. A new number can be put into the PV register (overwriting the
last entry) without clearing the calculator simply by entering it and pressing
PV. The new value replaces the old value. To clear a single register without
clearing the calculator, enter 0 and then press the key representing the
register to be cleared.

5. The appropriate number of decimal places is programmed on the HP 10BII+

by pressing [SHIFT], [DISP], and then the number of decimal places desired

16  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 for display. Turning off the calculator or clearing it will not change the
number of decimal places. To set four decimal places, the keystrokes are
[SHIFT], [DISP], 4. Note: Although the calculator will show only four
decimal places, actual calculations are based upon 12 internal digits. Only the
final answer is rounded to four decimal places. It is recommended that you
display four digits to the right of the decimal.

Whenever two dollar values are entered in the calculator as known values, one of
the values must be entered as a negative number [+/-] when solving for interest or
a number of periods. For instance, when calculating the interest rate for a single
sum, the known values are the number of compounding periods, the number of
compounding periods per year, the present value, and the future value. The
present value or the future value must be entered as a negative, or else the
calculator will not be able to perform the calculation (“No Solution” will appear
in the display). In general, a value representing an outflow is entered as a
negative number, whereas a value representing an inflow is entered as a positive.
Deposits, investments, or payments are outflows and usually are entered into the
calculator as negative values. The [+/-] key, located on the fifth row of keys on
the 10BII+, is pressed following entry of the value to change the sign—for
example, 1,000, [+/-], [PV].

Chapter 2: Fundamental Calculator Keystrokes  17

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Figure 1: HP 10BII+ Calculator

Using the Hewlett-Packard 12C Calculator

This chapter presents basic instructions for using the Hewlett-Packard 12C
calculator in computing answers to time value of money problems. The HP 12C
uses a logic called RPN. You may have noticed that there is no button with an
“=” sign on it. You will need to use the owner’s manual to learn how to do basic
math functions. Please note that these basic instructions are provided only as a
courtesy to HP 12C users. The College materials do not support the use of any
calculators other than the HP 10BII+.

18  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Before discussing the specific keystrokes used to calculate TVM problems, some basic
instructions for calculator usage are presented below.

1. The HP 12C has a method of accommodating more functions on its keyboard

than there are keys. Most keys have more than one job. Additional functions
are written above the keys (in gold/orange) or on the lower edge of the keys
(in blue). These are accessed in a manner similar to creating capital letters on
a typewriter, where a shift key is depressed. To access the functions written
in blue on a main key, press the [g] key (also blue), then the main key.
(Unlike on a typewriter, on a financial calculator the [g] key does not need to
be held down while the main key is pressed; it is pressed prior to the main
key.) For example, a quick way to turn an annual rate entered into the
calculator into a monthly rate is to press the [g] key, then the [i] key. (This
procedure will be given in this guide using the following notation:[g], 12 ÷.)
To access the functions written in gold, press [f] (also gold) and then the
main key. For example, to access the internal rate of return function (IRR),
press the [f] key, then the [FV] key. (This will be given in the owner’s
handbook as:[f],[IRR].)

2. The HP 12C calculator must be cleared before every problem. There are
procedures for clearing all stored numbers from all registers, and other
procedures for clearing only some of the registers. Especially when learning
how to use the calculator to perform time value of money calculations, it is
preferable to clear all storage before every problem. The following sequence
is used to clear the HP 12C:[f],[REG].

This clears all memory, including numbers stored using the STO key. To
clear only financial data, the following sequence is used:[f],[FIN].

3. The following HP 12C keys are used for basic TVM calculations:

Key Use

denotes total number of compounding periods (not necessarily years)

denotes periodic interest rate

Chapter 2: Fundamental Calculator Keystrokes  19

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Key Use

denotes present value (i.e., value before compounding takes place, or

after discounting)

denotes future value (i.e., value after compounding or before

discounting)

denotes periodic payment

used to indicate AD - annuity due (Annuity due is accessed using the

following keystroke sequence, after which “BEGIN” will appear in the
lower area of the display: g, BEG.)

used to indicate OA - ordinary annuity (In the absence of “BEGIN”

appearing in the display, the calculator automatically calculates an
annuity problem as if it were an ordinary annuity. If “BEGIN” appears in
the display, it may be eliminated for an ordinary annuity problem by
using the following keystroke sequence: g, END. The “BEGIN” notation
should disappear.)

4. The calculator always uses the last number entered into a register for a
calculation. For example, entering 1,200 and then pressing [PV] enters 1,200
into the PV register. A new number can be put into the PV register without
clearing the calculator simply by entering it and pressing [PV]. The new
value replaces the old value. To clear a single register without clearing the
calculator, simply enter 0 and then press the key representing the register to
be cleared.

5. The appropriate number of decimal places is programmed on the HP 12C by

pressing [f] and then the number of decimal places desired. For example, if
two decimal places are appropriate, press [f] and then 2. The number of
decimal places selected will remain until changed by pressing [f] and then
the new number of decimal places desired; clearing the calculator or turning
it off will not alter this. You should note that, although the calculator shows
only the number of decimal places selected, it retains substantially more
digits internally.

20  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Whenever two dollar values are entered into the calculator as known values, one
of the values must be entered as a negative number when solving for interest or a
number of periods. For instance, when one is calculating the interest rate for a
single sum, the known values are the number of compounding periods, the
present value, and the future value. Either the present value or the future value
must be entered as a negative, or the calculator will not be able to perform the
calculation (“Error 5” will appear in the display). In general, a value representing
an outflow from the individual is entered as a negative number, whereas a value
representing an inflow to the individual is entered as a positive. If the client is
depositing, investing, or making payments, these are outflows and usually are
entered into the calculator as negative values. The [CHS] key (change sign),
which is located near the center of the top row of keys, is depressed following
entry of the value.

Chapter 2: Fundamental Calculator Keystrokes  21

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Chapter 3: Basic Time Value of
Money Calculations
Reading this chapter will enable you to:

3–1 Calculate the capitalized value of a given income.

Capitalization of a Number

C
apitalizing a number is not a true time value of money concept. This
process is used to determine the investment needed to provide the
desired number of dollars through the use of interest only, leaving the
principal sum untouched. It is among the easiest of all calculations that may be
used when determining the amount needed to provide a specified income.

Testing tip: On the test, you may see what appears to be a TVM question, but it
does not include any number of income periods (N) that normally would be
required to solve such a problem. Don’t assume that the question is in error.
Rather, check to see whether it is a capitalization question. Capitalization
questions will not provide the number of years during which desired income will
be paid. This is known as ‘capital preservation’; or it could be said that one is
‘living off the interest’ in these cases.

The desired income is divided by the assumed interest rate expressed as a

decimal. Assume $30,000 is the desired income and the interest rate is 6%.

(1) $30,000 ÷ .06 = $500,000

To verify the answer, multiply the capitalized value by the interest rate:

(2) $500,000 × .06 = $30,000

22  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
With this approach, an individual with $500,000 in the bank earning 6% could
receive $30,000 per year forever. Unfortunately, inflation, which is not factored
in when capitalizing a number, gradually would erode the purchasing power of
that $30,000.

Examples. Solve the three capitalization questions shown below (rounded to the
nearest dollar).

1. David Dennison wants to have $40,000 per year at retirement, using only the
interest from his invested money. He expects to earn an average of 6.5%
annually. How much does he need to have in the bank to provide this annual
income?

Answer: $615,385

2. Charlene Bellingham wants to build up a bank account that will be large

enough to provide her with $15,000 interest per year to be used for travel. If
she can earn 7% on her money, how much will she need to reach her goal?

Answer: $214,286

3. When Steve and Marybeth Jones retire, they want a special fund set aside
that will provide them with $6,000 interest per year to purchase gifts for their
grandchildren. If they earn 5.25% on the money, how much money will have
to be in the fund?

Answer: $114,286

Reading the next part of this chapter will enable you to:

3–2 Calculate the future value for a given situation.

Future Value of a Single Sum

The future value of a single sum usually is the easiest time value concept to
understand. The term “single sum” refers to a lump-sum payment or receipt at
one point in time. The future value of a single sum is the future amount of an
initial deposit when it is compounded for a given number of periods and at a

Chapter 3: Basic Time Value of Money Calculations  23

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
given interest rate. Compounding is the process whereby interest is earned upon
interest. When a deposit is made, interest is earned on the deposit in the first
period; in subsequent periods, interest is earned not only on the original deposit
but also on the interest earned in each of the previous compounding periods.
Thus, interest is earned on increasing amounts over time.

Note: Keystrokes in this and following sections are for the HP 10BII+ calculator.
A number of the keystrokes relate to presetting the compounding periods on the
HP 10BII+. There are no corresponding keystrokes for the HP 12C calculator. To
accomplish the same calculations on the 12C, you must manually adjust the interest
rate (i) and term (n) to reflect the appropriate compounding period. Do this by
multiplying the stated years by the compounding period (e.g., 5 years, compounded
quarterly equals 5 × 4 = 20 periods), and dividing the annualized interest rate by
the same number (e.g., 8%, compounded quarterly = 8 ÷ 4 = 2%).

Tip for the HP 12C: Calculation of the monthly interest rate (i) and period (n)
may be simplified by entering the annual amount, pressing the g key, and then
the i key or the n key as appropriate.

Future value of a single sum. $1,000 is deposited at 8% interest, compounded

annually, for three years. What is the future value?

Steps Keystrokes

1. Clear calculator. [SHIFT], C ALL

2. Ensure that the number of compounding periods per year is 1, [SHIFT],

accurate. The number of compounding periods per year is shown
in the display when C ALL is held down during the clear function.
It will remain in the display until pressure is released from the
key. In this case, one period is appropriate.

3. Enter known values, in any order. 1000, ,

As indicated previously, the $1,000 represents an outflow to the

depositor; therefore, it is entered as a negative using the 8,
key.
3,

4. Request unknown value.

24  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
The display will show the answer—in this case, $1,259.71.

Future value of a single sum—more frequent compounding. $1,000 is invested

for five years in an account earning 8% annual interest, compounded
semiannually. What will be the value in five years?

Steps Keystrokes

1. Clear calculator. [SHIFT], C ALL

2. Ensure that the number of compounding periods per year is 2, [SHIFT],

accurate. In this case, two periods per year is appropriate.

3. Enter known values, in any order. 1000, ,

As stated previously, the value entered for N is the total 8,

number of compounding or discounting periods. In this case,
compounding occurs twice a year, so the total number of 5, [SHIFT],
compounding periods is 10. (or 5, ×, 2, =,
)

4. Request the unknown value.

The display will show the answer—in this case, $1,480.24.

Reading the next part of this chapter will enable you to:

3–3 Calculate the present value for a given situation.

Present Value of a Single Sum

The present value of a single sum is the present worth of a sum to be received in
the future that has been discounted for a given number of periods and at a given
interest rate. Present value is determined by reversing the compounding process,
also known as discounting. The three known variables used to compute a present
value of a single sum are the future value, the discount rate, and the number of
discounting periods. Present value concepts are important in comparing the value
of a dollar to be received at different points in time. Rather than measuring the
sum of a present amount at some future date, present value is concerned with

Chapter 3: Basic Time Value of Money Calculations  25

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
determining the current value of a future sum. The interest rate used when
determining present value commonly is called the opportunity cost. It represents
the annual rate of return that could be earned on money invested today. For
example, if an investor can earn 8%, compounded annually, on an investment
vehicle, the investor’s opportunity cost of not receiving (investing) dollars today
is 8%.

Present value of a single sum. An individual will receive $1,000 in three years.
How much is this worth today if the opportunity cost on investments is 8%
annually?

Steps Keystrokes

1. Clear calculator. (Keystrokes for clearing the calculator are

discontinued for the remainder of the instructions; this
procedure should become automatic as a step occurring
between each problem.)

2. Ensure that the number of discounting periods per year is

accurate
(1 P/YR).

3. Enter known values, in any order. 1000,

8,

3,

4. Request the unknown value.

The display will show the answer—in this case, $793.83. (A negative sign
precedes the answer in the calculator display.)

Present value of a single sum—more frequent compounding. An individual will

receive $1,000 in five years and has an opportunity cost of 8% annual interest,
compounded monthly. What is the value of this sum today?

26  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Steps Keystrokes

1. Clear calculator.

2. Ensure that the number of discounting periods per year is

accurate (12 P/YR).

3. Enter known values, in any order. 1000,

8,

5, [SHIFT],
(or 5, ×, 12, =,
)

4. Request the unknown value.

The display will show the answer—in this case, $671.21.

Reading the next part of this chapter will enable you to:

3–4 Calculate the number of compounding periods for a given situation.

3–5 Calculate the interest rate per compounding period for a given
situation.

Number of Compounding Periods and

Interest Rate per Compounding Period
The two previous sections discussed how to calculate the future value and present
value of a single sum. Normally, the known variables when determining the future
value are (1) interest rate per compounding period, (2) number of compounding
periods, and (3) present value. Likewise, the known variables when determining
the present value are (1) interest rate per discounting period, (2) number of
discounting periods, and (3) future value. However, the unknown variable in a
financial planning problem sometimes is the interest rate per compounding (or
discounting) period or the number of compounding (or discounting) periods. The
number of compounding periods and the interest rate per compounding period are
determined in situations that involve progression in time. The number of

Chapter 3: Basic Time Value of Money Calculations  27

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
discounting periods and the interest rate per discounting period are determined in
situations that involve regression in time.

Number of compounding periods. An individual has $1,000 to invest. He wants

to accumulate $3,500. He can earn 8% annual interest on investments. How
many years will it take to attain his goal?

Steps Keystrokes
1. Clear calculator.
2. Ensure that the number of compounding periods per year is
accurate (1 P/YR).
3. Enter known values, in any order. 1000, ,
3500,
8,
4. Request the unknown value.

The display will show the answer—in this case, 16.28 years. If this were asked as
a test question, the correct answer would be 17 years. (At the end of 16 years, he
would only have $3,425.94.) Remember, interest is accrued but posted to the
account at the specified interval (i.e., annually).

Number of compounding periods—more frequent compounding. An individual

invests $1,000 in an account earning an annual rate of 8%, compounded
semiannually. He wants to have a total fund balance of $3,670. How many years
will it take to achieve his goal?

Steps Keystrokes
1. Clear calculator.
2. Ensure that the number of compounding periods per year
showing in the display is accurate (2 P/YR).
3. Enter known values, in any order. 1000, ,
3670,
8,
4. Request the unknown value.

28  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
The display will show the number of compounding periods required for $1,000 to
accumulate to $3,670 at 8% annual interest, compounded semiannually—in this
case, 33.15. However, the question asks for the number of years that it will take.
Therefore, the result must be divided by the number of compounding periods in a
year to arrive at the number of years over the term of the investment. In this case,
33.15 (total compounding periods) is divided by 2 (number of compounding
periods in a year) to arrive at the answer, 16.58 years (keystrokes: ÷, 2, =).
Again, the correct answer to the question would be 17 years.

Interest rate. An individual has $1,000 to invest. He wants to accumulate $1,470

in five years. What annual rate of interest must be earned for him to accomplish
his goal?

Steps Keystrokes
1. Clear calculator.
2. Ensure that the number of compounding periods per year is
accurate (1 P/YR).
3. Enter known values, in any order. 1000, ,
1470,
5,
4. Request the unknown value.

The display will show the answer—in this case, 8.01%.

Interest rate—more frequent compounding. An individual invests $1,000 and

wants to accumulate $1,470 in five years. Earnings on this investment are
compounded quarterly. What annual rate of earnings is required?

Chapter 3: Basic Time Value of Money Calculations  29

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Steps Keystrokes
1. Clear calculator.
2. Ensure that the number of compounding periods per year is
accurate
(4 P/YR).
3. Enter known values, in any order. 1000, ,
1470,
5, [SHIFT],
(or 5, ×, 4, =,
)
4. Request the unknown value.

The display will show the answer—in this case, 7.78%.

Rule of 72
The “Rule of 72” provides a guideline for determining how long it will take an
investment to double in value or for determining the rate of return required for an
investment to double in value. To calculate the number of years required for an
investment to double in value, 72 is divided by the annual interest rate.

For example, assume an individual invests $1,000 at 8%, compounded annually.

He wants to double his investment to $2,000. Using the Rule of 72, divide 72 by
the annual interest rate (8). It will take approximately nine years for the
investment to double in value.

To calculate the interest rate required for an investment to double in value, divide
72 by the number of years. For example, assume an individual will invest $1,000
and leave it in an account for 10 years. He wants to double his investment. Using
the Rule of 72, divide 72 by the number of years the investment is held (10). He
should earn approximately 7.2% interest, compounded annually, to double his
investment in 10 years.

To determine how many years are required for an investment to triple, use the
Rule of 116—divide 116 by the expected return. For example, an investment
earning 8% annually will take 14.5 years to triple.

30  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Reading the next part of this chapter will enable you to:

3–6 Calculate the periodic payment for a given situation.

Present Value of an Annuity

The preceding material presented techniques for determining the present value
and future value of a single sum. However, many financial planning applications
involve payments or receipts at regular periodic intervals instead of as a lump-
sum payment or receipt. Such a stream of equal periodic payments or receipts
occurring at uniform intervals is known as an annuity.

Annuities are classified, depending on the timing of payments or receipts, either

as an ordinary annuity (OA) or an annuity due (AD). Ordinary annuity payments
or receipts are made at the end of each period (in arrears). Mortgage payments,
auto note payments, quarterly dividends, and semiannual interest payments are
examples of an ordinary annuity. Insurance policy premiums and lease payments
are examples of an annuity due, where payments or receipts are made at the
beginning of each period (in advance).

Present value of an annuity. An individual expects to receive a payment of

$1,000 at the end of each of the next three years. If opportunity costs (the amount
one might make if invested elsewhere) are 8% annually, what is the annuity
worth today? Stated differently; what amount would be required to be deposited
today (PV) to insure payments of $1,000 at the end of each year for the next three
years. The answer will be the present value of an ordinary annuity (PVOA) and
the amount deposited will have one year to generate additional interest earnings
to be distributed over the three-year period.

Chapter 3: Basic Time Value of Money Calculations  31

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Steps Keystrokes
1. Clear calculator.
2. Ensure that the number of compounding periods per year is
accurate
(1 P/YR).
3. Ensure that the calculator is programmed to calculate for an
ordinary annuity (payments at end of period). If set for an
ordinary annuity calculation, no message should appear in the
display. (If set for an annuity due, the letters “BEG” will appear in
the lower central region of the display. To change this, press
[SHIFT], then / .)
4. Enter known values, in any order. 1000,
8,
3,
5. Request the unknown value.

The display will show the answer—in this case, -$2,577.10. (The answer
displayed is negative as that would be an outflow that would be needed to
achieve this result.)

Had the problem stated that payments were to be received at the beginning of the
year, the calculation would have differed only in that, in Step 3, the calculator
would have been set to calculate an annuity due using the following keystrokes:
[SHIFT], / . (The answer then would be -$2,783.26, and this would be the
present value of an annuity due (PVAD) using [BEG] mode.)

Future Value of an Annuity

The concept of future value of an annuity is used to determine how much money
can be accumulated for a financial objective, such as a retirement fund or a
college education fund, if a fixed rate of return is assumed for periodic payments
of uniform size.

Future value of an annuity. An individual invests $1,000 at the beginning of

each of the next three years (future value of an annuity due—FVAD). He can
earn an 8% annual return on investments. What will be the value of the
investment in three years?

32  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Steps Keystrokes
1. Clear calculator.
2. Ensure that the number of compounding periods per year is
accurate (1 P/YR).

3. Ensure that the calculator is programmed to calculate for an

annuity due (payments at the beginning of the period). If set
correctly, “BEG” will appear in the display (keystrokes to set:
[SHIFT], / ).
4. Enter known values, in any order. 1000, ,
8,
3,

5. Request the unknown value.

The display will show the answer—in this case, $3,506.11.

Annuities—more frequent compounding. An individual invests $500 at the end

of each six-month period over the next three years. He can earn an annual rate of
8%, compounded semiannually, on his investment. What will be its value in three
years? This is a FVOA calculation, carried out in [END] mode.

Steps Keystrokes
1. Clear calculator.
2. Ensure that the number of compounding periods per year is
accurate
(2 P/YR).
3. Ensure that the calculator is programmed to calculate for an
ordinary annuity.
4. Enter known values, in any order. 500, ,
8,
3, [SHIFT],
5. Request the unknown value.

The display will show the answer—in this case, $3,316.49.

Chapter 3: Basic Time Value of Money Calculations  33

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Periodic Payment or Receipt
The preceding sections described techniques for calculating the present value and
future value of an annuity. The discussion now will focus on how to determine
the periodic payment or receipt given three known variables: the present value or
future value, the interest rate per compounding (or discounting) period, and the
number of compounding (or discounting) periods. The payment or receipt
concept is used to evaluate many financial planning problems, such as
determining the payment amount needed to attain a retirement or education goal,
comparing alternative funding methods to attain a client financial objective, and
evaluating the payment amount needed to purchase an automobile or residence.

Periodic payment or receipt. An individual wants to purchase an automobile for

$10,000 and can finance the purchase at 12%, compounded annually, for four years.
What payment will be required at the end of each of the four years?

Steps Keystrokes
1. Clear calculator.
2. Ensure that the number of compounding periods per year is
accurate (1 P/YR).
3. Ensure that the calculator is programmed to calculate for an
ordinary annuity.
4. Enter known values, in any order. 10000,
12,
4,
Because the $10,000 essentially represents an inflow to the
individual (i.e., the loan puts $10,000 in the individual’s hands to
purchase the car), the value is entered as a positive. Therefore,
is not used.
5. Request the unknown value.

The display will show the answer—in this case, –$3,292.34.

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Periodic Payment or Receipt—More Frequent
Compounding
Problem 1. An individual borrows $10,000 to finance the purchase of an
automobile. The loan is to be repaid over a four-year period at 12% annual interest,
compounded monthly. What will be the monthly payment?

Steps Keystrokes
1. Clear calculator.
2. Ensure that the number of compounding periods per year is
accurate (12 P/YR).
3. Ensure that the calculator is programmed to calculate for an
ordinary annuity. (You should note that the problem does not
specify whether payments are made at the beginning or end of
the period; in such cases, the annuity is assumed to be an
ordinary annuity.)
4. Enter known values, in any order. 10000,
12,
4, [SHIFT],
5. Request the unknown value.

The display will show the answer—in this case, –$263.34.

Problem 2. An individual wants to accumulate $10,000 in four years for a major

purchase. He can earn 12% annual interest, compounded monthly, on his
investment. The individual wants to invest a periodic amount at the beginning of
each month over the next four years to attain his goal. What payment is required
each month?

Steps Keystrokes
1. Clear calculator.

2. Ensure that the number of compounding periods per year is

accurate (12 P/YR).

3. Ensure that the calculator is programmed to calculate for an

annuity due.

Chapter 3: Basic Time Value of Money Calculations  35

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Steps Keystrokes
4. Enter known values, in any order. 10000,

12,

4, [SHIFT],

5. Request the unknown value.

The display will show the correct answer—in this case, –$161.72.

Keeping Some of the Money at the End of the

Annuitization Period
Standard annuity calculations assume that the entire principal is gone at the end
of the period. For example, if we want to know how much money we can receive
every month from our $250,000 nest egg, we can do a simple payment
calculation using the timeframe and interest rate assumptions we are given. If we
do the calculation over a 20-year period, at the end of 20 years, we will have no
money left.

However, what if we want to have money left at the end of the payment period?
Let’s say we would like $25,000 left at the end of the 20 years so that we can
give it to our favorite charity. How would we factor the desire to keep $25,000
into our annuity calculation?

Actually, it’s pretty simple. Whatever amount we want to keep, we enter as a

positive future value. So, if we want to have $25,000 left at the end of the
annuitization period, we would enter $25,000 FV (make certain it is entered as a
positive number—indicating that it is a value coming back to us). Of course,
holding back some of the funds means that monthly payments will be lower. As
an example, assume that Barb has $250,000 and wants to receive monthly
payments over a 20-year period. Also assume that she can earn 6% on invested
funds. Calculator inputs are fairly straightforward (set the calculator for monthly
compounding):

240 N (20 × 12), 6 I/YR, $250,000 (+/–) PV, PMT = $1,791.08

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Barb can receive periodic monthly payments of $1,791 for 20 years.

(Note: This calculation was done in END mode; had it been done in BEGIN
mode, the payments would be $1,782.17.)

Now, assume that Barb has decided that she wants to have $25,000 at the end of
the 20-year period so she can give the money to her grandchildren. She wants to
know how the amount of her monthly payments will be impacted given the new
factor. (Remember to set the calculator for monthly compounding.)

240 N, 6 I/YR, $250,000 (+/–) PV, $25,000 (+) FV, PMT = $1,736.97
(in END mode; or $1,728.33 in BEGIN mode)

The payments, as we anticipated, are a little smaller, but not much, because the
20-year residual amount of $25,000 is so small.

Any time the situation requires a remainder amount at the end of the annuity
payments, simply enter the required amount (as a positive), and calculate the
annuity payments as you would normally.

Chapter 3: Basic Time Value of Money Calculations  37

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Chapter 4: Intermediate Time
Value of Money Calculations
Reading this chapter will enable you to:

3–7 Calculate the present value for an inflation-adjusted payment.

Serial Payments

T
his chapter discusses the concept of a serial payment. Unlike an annuity,
which provides a series of regular equal payments, a serial payment
provides a series of regular payments that increase periodically with
inflation. Many clients depend upon a fixed income stream at certain points
throughout their lifetimes, for example, at retirement. However, in an inflationary
environment, a fixed-income annuity will not allow a retired client to maintain a
constant standard of living. A more acceptable means of providing an income
stream over a period of time is to have the stream of income increase annually as
inflation increases. This chapter describes how to determine the present value of
a serial payment and how to determine the serial payment needed to attain a goal.
The former (PV of a serial payment) is used again in planning insurance needs
and retirement needs; the latter (serial payment for a future sum) is used again for
planning retirement needs.

38  Introduction to the Time Value of Money

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Present Value of a Serial Payment
The present value of a serial payment is computed by compounding the periodic
payment at the inflation rate and then discounting the payment for the return on
investments. Assume a client wants to receive an equivalent of $10,000 in
today’s dollars at the end of each year for the next four years (i.e., the desired
annual payment amount, in the future, will buy what $10,000 will purchase
today). He assumes inflation will average 5% over the long run and that he can
earn an 8% compound annual return on investments. He wants to invest a lump
sum today to fund this need, and he wants to dissipate the fund entirely at the
beginning of the fourth year, when the last payment is received.
For the client to receive the equivalent of $10,000 in today’s dollars at the end of
each year, the payment first must be adjusted annually for the inflation rate. The
client needs $10,500 at the end of the first year, $11,025 at the end of the second
year, $11,576.25 at the end of the third year, and $12,155.06 at the end of the
fourth year to maintain a constant standard of living.
The client wants to invest a lump sum today to fund these distributions, and he
wants to dissipate the principal entirely at the end of the fourth year. The receipts
(that is, $10,500, $11,025, $11,576.25, and $12,155.06) must be discounted back
to present value to reflect the client’s ability to earn an 8% return on investments.
The exhibit below shows the amounts received at the end of each of the next four
years, discounted annually for the return on investments.
Exhibit 1

PV 0 1 2 3 4

$ 9,722 $10,500

9,452 $11,025

9,190 $11,576.25
8,934 $12,155.06
$ 37,298

Chapter 4: Intermediate Time Value of Money Calculations  39

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
The client needs to deposit $37,298 today to attain his goal of receiving the
equivalent of $10,000 in today’s dollars at the end of each of the next four years.

Inflation-adjusted interest rate. The calculation of the unknown present value

includes three known variables: the initial payment or receipt in today’s dollars
($10,000), the annual inflation-adjusted interest rate (used in the previous
calculations, but not as it is illustrated below), and the number of periods. (For
the HP 10BII+ calculator, the number of compounding periods per year also must
be entered.) The interest rate used for this calculation is not simply the difference
between the inflation rate and the rate of return. The appropriate method to
calculate the interest rate when simultaneously compounding a payment is based
on discounting an inflation rate based on a return. If the inflation-adjusted
interest rate is not used as the interest rate to calculate the amount needed to fund
serial payments, the result will be inaccurate; with an inaccuracy magnified as
the difference between the inflation rate and the return increases or the number of
payments increases. Following is the equation for the inflation-adjusted interest
rate.

 1 + Rate of return 
1 + Rate of inflation − 1 × 100
 

Therefore, for the previous example, the inflation-adjusted interest rate is

2.85714%.

1.08
= 1.0285714
1.05

(1.0285714 − 1) × 100 = 2.85714% or 2.8571%(rounded )

In the following keystroke sequence, the calculation of the inflation-adjusted

interest rate is bracketed. (As with other time value of money problems, you
should clear your calculator prior to performing this calculation.)

40  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Calculator: HP 10BII+1 HP 12C2
Keystrokes: (Set for 1 P/YR) 1.08, ENTER, 1.05, ÷
1.08, ÷, 1.05, –,1 1, – 100, ×,
×, 100, =, 10000,
10000, 4,
4,

1
With the 10BII+, calculation of the inflation-adjusted interest rate may be simplified by entering 1 +
the inflation rate, then pressing the INPUT key, entering 1 + the rate of return, pressing the [SHIFT]
key, and then pressing the % CHG key. For this example, the keystrokes for this problem would be
1.05, INPUT, 1.08, SHIFT, % CHG, I/YR.
2
With the HP 12C, the calculation of the inflation-adjusted interest rate may be simplified by entering
1 + the inflation rate, then pressing the ENTER key, entering 1 + the rate of return, and then
pressing the Δ % key.
For this example, the keystrokes for this problem would be 1.05, ENTER, 1.08, Δ %, i.

The display will show the answer—in this case, $37,298.32.

This answer is identical to the answer arrived at using the long-hand calculation
method in Exhibit 1. Here however, the calculated inflation-adjusted interest rate
is used just as it is illustrated in the preceding calculation.

The present value serial payment calculation may be used in a variety of

applications. As presented in this course, primary applications are those where the
desire is to make one deposit that will grow, when invested, to completely fund a
future need. Core examples of such needs include life insurance needs and college
funding (illustration follows). (The Retirement Planning course uses the same
process, but focuses on making payments to fund the future need. This
adds/modifies a few steps in the process presented here, and is discussed after the
College Funding Example.)

Chapter 4: Intermediate Time Value of Money Calculations  41

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
College Funding Example

One application of the present value of a serial payment is to determine funding

for a child’s college education. The calculation process involves three steps:

1. Determine how many years in the future the first tuition payment will be
needed, then calculate the future value of one year’s (current) tuition using
only the rate of inflation.

2. Calculate the present value (annuity due) of a serial payment using

 the inflated tuition amount from step one as PMT.

 the inflation-adjusted rate of return as I/YR using the following formula:

 1 + Rate of return 
1 + Rate of inflation − 1 × 100
 

and

 the number of years the child will attend college as N.

3. Discount the amount from the second step back to “today” using only the rate
of return.

The following example shows how to apply each of the three steps. Your answer
may vary slightly, as a result of rounding. For this example, assume that one
year’s college tuition is $10,000 today; education inflation is 6%; and the rate of
return is 8%. Further assume that Mary is three years old, and will begin a four-
year college program at age 18. Calculate the amount required to provide higher-
education funds for Mary.

42  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 CHILD: Mary
Annual college costs $ 10,000
STEP 1
Serial Payment Adjustment
Inflation Calculation:
Number of periods until student begins college 15
% inflation 6%
needed income when serial payments
begin $ 23,966
STEP 2
Serial Payment Calculation:
Number of years child will attend college 4
% inflation 6%
% after-tax return 8%
Calculate the present value of the annuity due $ 93,234
STEP 3
Discount Calculation:
Number of periods until student begins college 15
% after-tax return 8%
Calculate the present value of the above PVAD $ 29,391

Note: Present value of serial payment calculations are used in the life insurance
needs determination process. You can find additional practice questions in
Module 6, The Life Insurance Selection Process.

Calculating for payments in Step 3 (rather than a lump sum)

NOTE: YOU WILL NOT BE REQUIRED TO CALCULATE PAYMENTS

FOR STEP 3 ON THE COURSE EXAM. THE INFORMATION IS
INCLUDED HERE AS GENERAL INFORMATION ONLY
(the process is used and tested in the Retirement Planning course).

When using the serial payment process to determine a series of payments to fund
the future need, rather than a lump sum, the calculation steps are a little different.
As previously discussed, payments come in two types: level (periodic) and serial
(increasing). When determining both types of payment, the first two steps in the

Chapter 4: Intermediate Time Value of Money Calculations  43

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
serial payment process (as described above) remain the same. Step 3 gets
modified.

If the goal is to use a level or periodic payment to fund the future need (rather
than the lump sum identified previously in Step 3), simply solve for PMT instead
of PV. So, using the ending value in Step 2 (College Funding example above),
the keystrokes to determine a level payment for Step 3 are (in END mode;
ordinary annuity):

15 N, 8 I/YR, (0 PV), 93,234 FV, PMT = $3,433

Note that the only difference between calculating a lump sum or a payment for
Step 3 is pressing the PMT key rather than the PV key.

When the goal is to make serial payments to fund the future need, the process is
more complex, requiring several additional steps. We will not go into detail on
this process, but a general overview is worthwhile.

Once you have determined the Step 2 amount (e.g., $93,234 in the example
above), you must bring that amount back to today’s dollars. This means you
deflate the future sum. To do this, instead of using the investment rate for I/YR
(e.g., 8%), you use the inflation rate (e.g., 6%). Expanding the example above,
the keystrokes to do this are:

15 N, 6 I/YR, 0 PMT, 93,234 FV, PV = $38,903.29

Now that you have a new starting point (e.g., 38,903), you can proceed to
calculate the serial payment needed to fund the future need. To do this, you need
to learn another serial payment calculation: serial payment for a future sum.

44  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Reading the next part of this chapter will enable you to:

3–8 Calculate the inflation-adjusted payment for a future sum.

Serial Payment for a Future Sum

NOTE: THE SERIAL PAYMENT FOR A FUTURE SUM CALCULATION

MAY BE TESTED ON THE COURSE EXAM. AS SUCH, YOU NEED TO
KNOW THE INFORMATION FOR THIS COURSE (as well as for the
Retirement Planning course).

This chapter describes how to determine the periodic savings needed to attain a
future goal when an increasing payment is chosen. A serial payment may be
calculated to determine the annual savings needed to attain a financial goal. For
example, to fund a future retirement income objective, the financial planner
might recommend that the client save a certain amount in today’s dollars each
year. The savings dollar amount would increase annually with the rate of
inflation to maintain a constant value to finance a constant standard of living.

Assume a client wants to retire in five years. In terms of today’s dollars, he will
need an additional $100,000 in five years to have sufficient funds to finance his
retirement. He assumes inflation will average 4% over the long run and that he
can earn a 7% annual return on investments. He wants to determine a series of
payments that will add up to $121,665 in five years. (The future value of
$100,000 inflated by 4% annually for five years is $121,665.29.)

Chapter 4: Intermediate Time Value of Money Calculations  45

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Note: In order to perform the required calculation on a financial calculator (e.g.,
HP 10BII+), the $100,000 future need—as stated in today’s dollars—must be
entered as a future value. Why? The calculator is programmed to inflate the
$100,000 at the same time it is calculating the serial payment. This is why you do
not enter the $100,000 as a present value. It may not make logical sense (i.e.,
“Shouldn’t the $100,000 stated in today’s dollars be entered as a present
value?”), but this is the way the calculator is programmed, so this is the required
entry.

In performing this calculation on a financial calculator, the steps are identical to

those for calculating the payment for an ordinary annuity, except that the
inflation-adjusted interest rate is used. (Clear your calculator and set it to
calculate for an ordinary annuity.)

The keystrokes are as follows:

Calculator: HP 10BII+ HP 12C

Keystrokes: (Set for 1 P/YR) 1.07, ENTER, 1.04, ÷
1.07, ÷, 1.04, –,1 1, – 100, ×,
×, 100, =, 100000,
100000, 5,
5,

The answer to the above calculation, $18,878.96, must be adjusted annually for
inflation because it represents the current value of the payment. In other words,
while this calculation was made as if the first payment would be made “today,”
the first payment will actually be made in the future. This means that inflation
must be added to the answer in order to arrive at the correct future payment
amount. This is true even though inflation was factored into the initial
calculation. Again, the reason to add inflation is that the calculated payment will
not be made immediately, but at some point in the future. For these calculations,
the future payment date is assumed to be one year from “today,” so a year’s
worth of inflation must be added to the initial calculation in order to arrive at the
correct answer.

46  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
As shown in the following exhibit, the first payment will not be made until one
year from now, at point A. Thus, the deposit needed at the end of the first year is
$19,634.11 ($18,878.96 × 1.04); at the end of the second year, $20,419.48; at the
end of the third year, $21,236.26; at the end of the fourth year, $22,085.71; and at
the end of the fifth year, $22,969.14. This exhibit illustrates the timing of the
annual deposits and the accumulated amount at the end of the five years using
7% discounting. The goal of $100,000 in today’s dollars ($121,665.29) will be
reached with this stream of payments, representing an adjustment for inflation to
our future sum.

Exhibit 2
0 1 2 3 4 5 FV

$19,634.11 $25,736.31
$20,419.48 25,014.74
$21,236.26 24,313.39
$22,085.71 23,631.71
22,969.14
$121,665.29

Reading the next part of this chapter will enable you to:

3–9 Determine the general result when one parameter in a time value of
money calculation is changed.

Calculations Involving Single Sums

Combined with Annuities
Many calculations involve both single sums and annuities. For instance, an
investor may make an initial deposit into a mutual fund of $2,000 [PV] and
subsequently invest $250 at the end of each year for 15 years [PMT]. In this case,
the initial deposit of $2,000 is treated as a single sum, whereas the $250 annual

Chapter 4: Intermediate Time Value of Money Calculations  47

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
payment stream is treated as an annuity. Calculator instructions for several types
of combined single sum/annuity problems are provided below.

Future value calculation problem. An investor makes an initial deposit of

$20,000 into a mutual fund. Each subsequent year he deposits an additional
$2,500 into the fund. What will be the value of the account in eight years if the
fund earns 9% annually?
As pointed out previously, the initial deposit is treated as a single sum, while the
$2,500 annual payment stream is treated as an annuity, with the first payment
being made one year from today.

The time line below illustrates the pertinent information presented in the
problem. (Cash inflows for this time line and the time lines that follow are shown
above the line, whereas cash outflows are shown below the line.)

1N = 1 Year ?

0 1 2 3 4 5 6 7 8
$20,000 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500

A time-consuming method of dealing with this problem would be first to

calculate the future value of $20,000 in eight years at 9% annual earnings, then to
calculate the future value of the annuity stream in eight years at 9% annual
earnings, and finally to add the two future values together. However, the
financial calculator is capable of accommodating both the initial deposit and the
subsequent stream of payments in one calculation. Keystrokes are shown as
follows:

(Clear your calculator and set for an ordinary annuity.)

Calculator: HP 10BII+ HP 12C

Keystrokes: (Set for 1 P/YR) 20000, ,
20000, , 2500, ,
2500, , 9,
9, 8,
8,

48  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
The future value in this case is $67,422.44.

Present value calculation problem. A client would like to accumulate $300,000

for retirement, which will begin in 10 years. She can invest $10,000 at the end of
each year toward this goal in an account earning 8% annually. What initial lump-
sum deposit, in addition to the payment stream, is required for her to be able to
meet this goal?

This problem is illustrated below on the time line.

1N = 1 Year $300,000

0 1 2 3 4 5 6 7 8 9 10
? $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000

Keystrokes are as follows:

(Clear your calculator and set for an ordinary annuity.)

Calculator: HP 10BII+ HP 12C

Keystrokes: (Set for 1 P/YR) 300000,

300000, 10000, ,

10000, , 8,

8, 10,

10,

The initial deposit required to meet the client’s goal is $71,857.23.

Compounding periods calculation problem. A client wants to save $125,000 to

achieve a future goal. He has $26,000 to invest currently and can invest $10,000
at the end of each year toward his goal. If the investment vehicle selected earns
10% annually, how many years will it take to achieve his goal?

Chapter 4: Intermediate Time Value of Money Calculations  49

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
This problem is illustrated on the time line below.

1N = 1 Year $125,000

0 1 2 3 ?
$26,000 $10,000 $10,000 $10,000

Keystrokes are as follows:

(Clear your calculator and set for an ordinary annuity.)

Calculator: HP 10BII+ HP 12C

Keystrokes: (Set for 1 P/YR) 125000,

125000, 26000, ,

26000, , 10000, ,

10000, , 10,

10,

The answer is 6.08 years. (On the HP 12C, this response is rounded up
to 7.) The correct answer on a test question would be seven years, as at the end of
six years he has not met his goal. He would only have $123,216.69, $1,783.31
short of his goal.

Periodic payment problem. A client wishes to accumulate $90,000 for a future

goal in seven years. She can deposit $32,000 today in an account earning 11%
annual interest and plans to make an additional payment into the account at the
end of each year. What periodic payment will be required at the end of each year
to meet her goal?

This problem is illustrated on the time line below.

50  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 1N = 1 Year $90,000

0 1 2 3 4 5 6 7
$32,000 ? ? ? ? ? ? ?

Keystrokes are as follows:

(Clear your calculator and set for an ordinary annuity.)

Calculator: HP 10BII+ HP 12C

Keystrokes: (Set for 1 P/YR) 90000,

90000, 32000, ,

32000, , 7,

7, 11,

11,

The periodic payment required each year is $2,408.49.

Rate of return problem. Six years ago a client invested $5,000 in a mutual fund.
He made additional investments of $300 at the end of each year. Yesterday the
client redeemed all fund shares and received $8,500. What was the rate of return
on this investment?

This problem is illustrated on the time line below.

1N = 1 Year $8,500

0 1 2 3 4 5 6
$5,000 $300 $300 $300 $300 $300 $300

Chapter 4: Intermediate Time Value of Money Calculations  51

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Keystrokes are as follows:

(Clear your calculator and set for an ordinary annuity.)

Calculator: HP 10BII+ HP 12C

Keystrokes: (Set for 1 P/YR)

5000, , 5000, ,

300, , 300, ,

8500, 8500,

6, 6,

The rate of return has been 4.44% annually.

When the problem involves compounding and payments that happen more
frequently than annually, the adjustments discussed in Chapters 1 and 2 must be
made. (For the HP 12C, the periodic interest rate and the number of
compounding periods must be adjusted.)

52  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Chapter 5: Advanced Time Value
of Money Calculations
Note: The following material is presented as reference material to help you
learn time value of money concepts. This material will not be tested in the
current course; it will be discussed more completely and tested in the
Investment Planning course.

Calculations Involving Unequal Cash Flows

U
ntil now, all calculations have involved single sums, equal periodic
payments or receipts, or a combination of the two. In many cases, cash
flows to and from an investment are not equal and/or do not occur at
regular intervals. Real estate problems are a typical example of this type of
problem.

This chapter of the guide focuses on calculations involving unequal cash flows.
Generally, most of these calculations will require solving for the compound
return (IRR) or for the present value of an asset. Although these calculations are
based upon the time value of money concepts discussed previously, the calculator
keystrokes are substantially different.

The following points apply to all calculators when performing calculations

involving unequal cash flows.

1. Cash inflows to the investor must be input as positive numbers, whereas cash
outflows must be input as negative numbers for the calculator to provide the
correct solution.

2. Before beginning a problem of this type, determine the compounding period.

The compounding period is the period of time between two consecutive cash
flows (for example, semiannual is two periods per year).

Chapter 5: Advanced Time Value of Money Calculations  53

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3. A cash flow or a zero must be entered for every compounding period during
the holding period of the investment; otherwise, the number of compounding
periods will be incorrect.

4. On some calculators (for example, the HP 12C), the IRR calculated will be
the average compound return for one period of N, which is the same as the
length of time between two consecutive cash flows. If one period of N is not
a year, then the IRR calculation must be adjusted to an annual basis.

5. Equal consecutive cash flows can be input together. This will be

demonstrated later.

6. The first cash outflow, usually the purchase of an investment, is called Cash
Flow 0 (CF0). It occurs at N = 0 on the time line. (On the HP 12C, CF0
cannot be grouped with consecutive cash flows for input, even if they are the
same.)

7. If PV is being calculated, CF0 is input as a zero.

Calculating Internal Rate of Return

Problem 1. What is the average compound rate of return that has been earned
from investing in an antique chair that was purchased six years ago for $300, was
repaired at the end of the second year at a cost of $150, and has just sold for
$850?

Calculator: HP 10BII+ HP 12C

Keystrokes: 300 , 300 , ,

0 0 ,
150 , 150 , ,
0 0 ,
0 0 ,
0 0 ,
850 850 ,
[SHIFT], ,

IRR, or average compound rate of return = 12.54%

54  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
The previous problem involved one series of cash flows that were equal (that is,
the three zero cash flows). Rather than entering each cash flow separately, each
calculator has a means of accounting for consecutive repeating cash flows. The
keystrokes for the previous problem are repeated below, showing the method for
handling consecutive repeating cash flows. (Be sure to clear your calculator prior
to each problem.)

Calculator: HP 10BII+ HP 12C

Keystrokes: 300 , 300 , ,

0 0 ,
150 , 150 , ,
0 0 ,
3 , 3 ,
850 850 ,
[SHIFT], ,

IRR, or average compound rate of return = 12.54%

Problem 2. What is the IRR earned on a three-year investment in a mutual fund that
pays the following quarterly distributions: four distributions at $50, four at $57, and
four at $60? These distributions are not reinvested back into the fund. The initial
investment into the fund was $12,000, and the final value of the mutual fund account
at the time of the last quarterly distribution was $16,500.

Calculator: HP 10BII+ HP 12C

Keystrokes: (4, [SHIFT], ) 12,000 , ,
12,000 , 50 ,
50 4 ,
4 , [SHIFT], 57 ,
57 4 ,
4, [SHIFT], 60 ,
60 3 ,
3, [SHIFT], 16,560 , *
16,560 * ,
[SHIFT], 4, x
IRR, or average compound rate of return = 12.36%†
* The last cash flow is $16,560 because it is the total of the account value of
$16,500 and the last distribution of $60.
† The return for one period, which is one quarter of a year, is 3.089%. On some
calculators, the answer must be multiplied by four to convert it to an annual return
of 12.36%.

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Calculating Present Value and Net Present Value of
Unequal Cash Flows
Capital projects and long-term investments can be evaluated by discounting
future cash flows at a given discount rate to determine their total present value
(PV). The difference between the total present value of the cash flows and the
amount of the initial outlay (cost or investment) is the investment’s net present
value (NPV).

Present value of cash flows

Less: Cost of investment

Equals: Net present value of

investment

If the net present value is positive, it means that the investment would earn a
return more than the discount rate (required rate of return). If the NPV is
negative, it means the investor would earn a return less than the discount rate.

Problem 1. A real estate property being offered for $100,000 is expected to have
cash flows of $6,000, $7,000, and $8,000 over each year in the following three-
year period, respectively. At the end of three years, it is expected to have a value
of $115,000.

If an investor has a required rate of return of 10%, what is the present value and
net present value of the property?

In this example, we will solve for the present value and then subtract the offer
price (the expected cost of the property) to obtain the NPV. Alternatively, we
could input $100,000 (a cash outflow) as the initial cash flow; then our answer
would be the NPV, without the need to subtract the $100,000. Try it both ways.

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 Calculator: HP 10BII+ HP 12C
Keystrokes: 0 0 ,
6,000 6,000 ,
7,000 7,000 ,
123,000 123,000 ,
10 10
[SHIFT], ,

PV = $103,651

The present value (the price) that will allow a 10% return on the investment is
$103,651. That is, the investor could actually pay $103,651 and receive a 10%
return on his or her investment.

When the amount of the initial investment is subtracted from the present value,
the result is referred to as the net present value (NPV).

$103,651 Present value

100,000 Initial investment
3,651 Net present value

Since the NPV is positive, it means that if the investor paid $100,000, the IRR for
the property would be higher than the discount rate (required return) of 10%.
Actually, the return is 11.40%.

Calculator: HP 10BII+ HP 12C

Keystrokes: 100,000 , 100,000 , ,

6,000 6,000 ,
7,000 7,000 ,
123,000 123,000 ,
[SHIFT], ,

IRR = 11.40%

If the investor’s required rate of return had been 12%, the present value would
have been $98,486 and the NPV would have been a negative $1,514. Therefore,

Chapter 5: Advanced Time Value of Money Calculations  57

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if the investor had paid $100,000 when the present value was only $98,486, the
rate of return would be less than 12%.

Problem 2. What is the present value of an investment for which the following
cash flows are expected, assuming that the client’s required compound rate of
return for an investment at this level of risk is 10.5%?

Inflow Outflow
End of year 1 $100 –
End of year 2 – $50
End of year 3 – $50
End of year 4 – $50
End of year 5 – –
End of year 6 $300 –

Calculator: HP 10BII+ HP 12C

Keystrokes: 0 0 ,
100 100 ,
50 , 50 , ,
3, [SHIFT], 3, ,
0 0 ,
300 300 ,
10.5 10.5
[SHIFT], ,

The present value, or the price, that will allow a 10.5% return on this investment
is $143.75. In other words, if you invested $143.75 today and received the cash
flows indicated in the table above over the six years subsequent to making the
investment, you would achieve a 10.5% compound return. If you invest more
than $143.75, you will receive a compound return less than 10.5%; and if you
invest less than $143.75, you will receive a compound return more than 10.5%.

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Squares, Square Roots, and Nth Roots
Some problems involve using squares, square roots, and nth roots. The following
calculator techniques will help you.
Before doing these problems, set your calculator to four decimal places.

Squares. What is the product of 4.5 squared? (What is 4.52?)

Calculator: HP 10BII+ HP 12C

2
Keystrokes: 4.50 [SHIFT], x 4.5 ENTER, 2, yx

Answer: 20.25

Square roots. What is the square root of 20.25?

Calculator: HP 10BII+ HP 12C

Keystrokes: 20.25 [SHIFT], x 20.25 ENTER, g, x

Answer: 4.5

Nth roots. What is the fifth root of 100?

5
100 = 1001 / 5 = 100 0.2

Procedure:

1. Express the problem with a fractional exponent (1/5).

2. Change the exponent into a decimal (1/5 = 0.2).

3. Use the yx key.

Chapter 5: Advanced Time Value of Money Calculations  59

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 Calculator: HP 10BII+ HP 12C
Keystrokes: 100 [SHIFT], yx, 0.2, = 100 ENTER, 0.2, yx

or use these alternative keystrokes

Keystrokes: 100 , yx, 5, [SHIFT], 100 ENTER, 5, 1/x,

1/x, = yx

Answer: 2.5119

Amortization
Amortization (for our purposes) is the process of liquidating a debt by making
installment payments. Amortization calculations are done to divide a payment, or
series of payments, into the amount that applies to interest and principal.

The amortization process involves two sets of calculations. The first step
calculates the periodic payment; the second step identifies the interest and
principal amounts.

Problem. Ted and Mary Bigelow are planning to purchase a $300,000 home, by
making a 20% down payment, and financing the remainder with a 30-year,
7.25% fixed-rate mortgage. What will be the monthly payment, and how much
will the Bigelows have paid in interest and principal by the end of the first year
(12 months)?

Step 1. Calculate the monthly payments.

[HP 10BII+: set payments per year to 12 (12, [SHIFT], P/YR)]

PV = 240,000 (300,000 – 20%)

N = 360 (30, [SHIFT] xP/YR)

I/YR = 7.25 (HP 12C: I=.6042)

PMT = 1,637.22

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Step 2. Determine interest and principal payments

HP 10BII+:

1, INPUT, 12, [SHIFT] AMORT, equals (pressing the equals [=] key cycles
through interest, principal, and balance)

Principal = $2,322.86, Interest = $17,323.82, Balance = $237,677

HP 12C:

12, f, AMORT = $17,323.82 (interest)

X/Y = $2,322.86 (principal)

RCL, PV = $237,677 (balance)

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Summary

T
his module presented time value of money concepts, and demonstrated
how five variables interact in a given situation. The five variables are
present value, future value, interest rate, number of compounding
periods, and periodic payment amount. While the ability to competently use a
financial calculator is important for the student, understanding the relationships
among the time value variables is critical. This knowledge will serve you
throughout the CFP Certification Professional Education Program as well as in
real-life client situations.
Having read the material in this module, you should be able to:

3–1 Calculate the capitalized value of a given income.

3–2 Calculate the future value for a given situation.

3–3 Calculate the present value for a given situation.

3–4 Calculate the number of compounding periods for a given situation.

3–5 Calculate the interest rate per compounding period for a given
situation.

3–6 Calculate the periodic payment for a given situation.

3–7 Calculate the present value for an inflation-adjusted payment.

3–8 Calculate the inflation-adjusted payment for a future sum.

3–9 Determine the general result when one parameter in a time value of
money calculation is changed.

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Before moving on to the next module, answer the Module Review Questions
that follow, and check your answers with those provided in the Answers
section following the questions. Review the module text to help you master
any learning objective areas for which you are not able to adequately answer
questions.

Summary  63
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Module Review
Common Calculation Errors
Note: Students often make several errors in calculations for time value of money
problems, which may cause answers to vary from those provided in this section. If
you are unable to derive the same answer as presented here, please check that the
following procedures have been followed.

 The calculator must be appropriately cleared before every problem. If not

cleared or if cleared incorrectly, the calculator may retain values in its
memory that will alter the final answer. Please review the calculator
instruction book or the appropriate chapter of the Introduction to the Time
Value of Money module to verify the correct keystroke sequence.

 Any arithmetic required should be done directly prior to entering a value so

as to eliminate rounding errors. For instance, assume you have a 10% annual
rate of interest that is compounded monthly. To determine a monthly
compounding rate, divide 10 by 12; immediately enter that result by pressing
the I/YR key. (Note: This is not necessary if you have preset the calculator
for the appropriate compounding period.)

For Hewlett-Packard calculators, when two opposing dollar values are entered as
known values for a problem, one value must be entered as a negative or the
calculator will display an error notation. The general rule is that outflows are
entered as negatives, whereas inflows are entered as positives.

 For the HP 10BII+:

[xP/YR] is the [SHIFT] function key under N.

DO NOT read this as “times (×) the [P/YR] key.”

Note: Some models of the HP 10BII+ use the color gold (which you may see as
either orange, pumpkin, red, or similar) for the [SHIFT] key. The shift key will
be identified using the name gold or [shift] key.

64  Introduction to the Time Value of Money

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Switch between the Begin and End modes by using the [SHIFT] function key.

Between calculations, always verify that all the memory banks are cleared. Use
the [SHIFT] [C ALL] key (under the [C] key on the 10BII+), which will also tell
you the default number of compounding periods. Change the number of default
compounding periods for each problem as necessary.

If the number of compounding periods is more than one year, adjust the
calculator by changing the default number of compounding periods. Use [P/YR],
which is the [SHIFT] function key under PMT.
The final step if you are receiving the wrong answer is to “apply brain.” It is easy
to trust the calculator without questioning whether the answer makes sense.
Sometimes the question is a two-step process and if you just jump to the answer
on the calculator you will have a wrong answer. Investing $100 for five years
shouldn’t result in $20,000. In this case, you either forgot to clear your calculator
or have it in 12 compounding periods versus one compounding period. Learn to
think through what might be wrong before you decide to accept the answer
showing on your screen.

Module Review  65
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Questions
3–1 Calculate the capitalized value of a given income.

1. David Charles wants to establish a scholarship fund for his alma mater. He
wants the fund to provide $15,000 per year to qualified students. Calculate
how much he will need to have in the fund to provide that amount of money
each year, using interest only, assuming the fund earns 6% annually.
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

2. In addition to her expected retirement income, Deborah Fairn wants some

extra spending money when she retires. She expects that the fund she wants
to set up for this purpose will earn 5% annually, conservatively. How much
will she need to have in the fund at retirement in order to have $3,000 per
year to spend?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

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 3–2 Calculate the future value for a given situation.

3. Today, Sol Gibson purchased an investment-grade diamond for $50,000. He

expects it to increase in value at a rate of 15%, compounded annually, for the
next five years. How much will his diamond be worth at the end of the fifth
year if his expectations are correct?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

4. Sophie Armstrong has been investing $1,000 at the end of each year for the
past 15 years. How much has accumulated, assuming she has earned 9%,
compounded annually, on her investment?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

5. Gloria Baker invested $14,000 in an interest-bearing account earning a 13%

annual rate, compounded monthly. How much will be in her account at the
end of eight years?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  67
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6. Leon Caine invested $35,000 in an account earning an 11.5% annual rate,
compounded quarterly. How much will be in his account at the end of seven
years?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

7. In January 2006 Jeff Gills loaned $10,000 to his son at 9% interest,

compounded annually and payable upon termination of the loan. When his
son repaid the loan in January 2010, how much did Jeff receive?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

8. Margaret Fowler wants to accumulate $70,000 for a down payment on a

home in four years. She can invest $1,100 at the beginning of every month
for the next four years. She expects to earn 12% per year, compounded
monthly, on investments. Will she be able to attain her goal?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

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9. Marty and Jane Fisher have been investing $10,500 at the end of each six-
month period to accumulate funds for retirement. They plan to retire in 12.5
years and have been earning an 8% annual rate, compounded semiannually,
on their investments. How much will they have accumulated at retirement?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

10. Christie Moore has been dollar cost averaging in a mutual fund by investing
$2,200 at the end of every quarter for the past seven years. She has been
earning an average annual compound return of 9%, compounded quarterly,
on this investment. How much is the fund worth today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

11. Tracey Bergen purchased $75,000 worth of gold coins nine years ago. The
coins have appreciated at a rate of 4.5%, compounded annually, over the last
nine years. How much are the coins worth today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  69
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12. Dale Sword invested $45,000 in a mutual fund. He expects the fund to earn a
10.25% annual rate of return, compounded monthly, over the next 3½ years.
How much will be accumulated at the end of 3½ years if Dale’s expectations
are correct?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

13. Sophie Armstrong has been investing $1,000 at the beginning of each year
for the past 15 years. How much has she accumulated, assuming she has
earned 9%, compounded annually, on her investment?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

3–3 Calculate the present value for a given situation.

14. Sarah Long wants to give her daughter $20,000 to start her own business in
eight years. How much should she invest today at an annual interest rate of
6%, compounded annually, to have $20,000 in eight years?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

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15. Max Simpson wants to deposit a sum today that will be entirely dissipated in
eight years. He wants to withdraw $1,200 at the beginning of every six-
month period and expects to earn an annual 11%, compounded semiannually,
on investments. How much does Max need to deposit today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

16. Rosemary Wilken wants to accumulate $75,000 in 6½ years to purchase a

houseboat. She expects an annual rate of return of 11.5%, compounded
quarterly. How much does Rosemary need to invest today to attain her goal?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

17. Karen Jones, who was injured in an automobile accident, won a judgment
that provides her $1,200 at the end of each six-month period over the next six
years. If the escrow account that holds Karen’s settlement award earns an
average annual rate of 10.5%, compounded semiannually, how much was the
defendant initially required to pay Karen to compensate for her injuries?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  71
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18. Lois Wiley expects to receive $100,000 from a trust fund in nine years. What
is the current value of this fund if it is discounted at 8%, compounded
semiannually?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

19. Elizabeth Becker has a balloon payment of $40,000 that is due in four years.
If she can make the lump-sum payment today, how much should she offer if
she discounts the loan at a rate of 10%, compounded annually, for four
years?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

20. Cindy Nichols wants to withdraw $700 at the beginning of each month for
the next three years. She expects to earn a 10% APR, compounded monthly,
on her investments. What lump sum should Cindy deposit today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

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21. Stan and Robin Payne want to accumulate $30,000 in 3½ years to use as a
down payment on a home. They expect to earn a 7.25% annual rate,
compounded quarterly, on their investment. How much do the Paynes need
to invest today to attain their goal?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

22. Jodi Cook expects to receive an inheritance of $95,000 in three years. Her
opportunity cost on investments is 8%, compounded annually. What would
the inheritance be worth to Jodi today if she could get it?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

23. Mickey Dodge expects to receive $57,000 in four years. His opportunity cost
on investments is an annual rate of 9%, compounded monthly. What is this
sum worth to Mickey today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  73
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24. Robert Fine expects to receive $3,000 at the end of each of the next four
years. His opportunity cost on investments is 12%, compounded annually.
What is this sum worth to Robert today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

25. Jana Hamill wants to withdraw $1,000 at the beginning of each year for the
next six years. She expects to earn 10.5%, compounded annually, on her
investment. What lump sum should Jana deposit today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

26. Francis Kettering’s car payments, including principal and interest, are $300
at the end of each month. He has a three-year note with a 14% interest rate,
compounded monthly. What was the amount of Francis’s original note?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

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27. Helen Johnson will receive $500 at the beginning of every month for the next
four years. Her opportunity cost on investments is 14%, compounded
monthly. What is this stream of payments worth to Helen today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

28. Lori McCormick will receive $25,000 in lottery winnings at the end of each
year for the next seven years. Her opportunity cost on investments is 11.75%
compounded annually. What is this sum worth to Lori today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

3–4 Calculate the number of compounding periods for a given situation.

29. Joseph Baldwin’s grandfather opened a $500 savings account for Joseph
when he was born, and the account now has a value of $1,800.
Approximately how old is Joseph if the deposit has been accumulating at an
annual rate of 4%, compounded annually?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  75
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30. Carol McCartney purchased a plot of unimproved land for $2,500 last week.
Her real estate agent was confident the land would appreciate at an average
annual compound rate of 15.5%. Carol wants to sell the land for $7,500.
Approximately how many years must she own the property to receive $7,500
when she sells it?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

31. Several years ago Clarence Watt purchased a rug for $5,000 when he was in
the Middle East. Today he sold the rug for $12,250. Clarence estimates the
average annual compound rate of return on the rug was 14%. Approximately
how many years did Clarence own the rug?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

32. Today, Paul Rommel put $1,000 into an account earning an annual interest
rate of 8%, compounded monthly. Assuming he makes no withdrawals or
additional payments regarding this account, approximately how many years
must Paul wait for his account to increase in value to $2,000?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

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33. Brad Winstone wants to save $60,000 to open his own law practice. He
recently received an inheritance of $15,000, which he can invest at an 8%
APR, compounded semiannually. If this is the only investment he can make
toward his goal, approximately how many years will it be before Brad has
$60,000?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

3–5 Calculate the interest rate per compounding period for a given
situation.

34. Lucy Aims invested $8,000 in a certificate of deposit (CD). In three years,
when the CD matures, Lucy will receive $12,000. If interest is compounded
weekly, what is the average annual compound rate of return on the CD?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

35. Betty Sims deposited $200 in a savings account at the end of each month for
four years, at which point she had accumulated $10,820. If interest was
compounded monthly, what was the average annual compound rate of return
on the account over the four-year period?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  77
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36. Victor Allen purchased 20 shares of an aggressive growth mutual fund at $85
per share six years ago. Today he sold all 20 shares for $3,200. What was the
average annual compound rate of return on his investment before taxes?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

37. Susan Mackey purchased a zero-coupon bond 4½ years ago for $625. If the
bond matures today and the face value is $1,000, what is the annual
compound rate of return that Susan realized on her investment if interest on
the bond is compounded semiannually?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

38. Carter Johnson borrowed $600 from his father to purchase a touring bicycle.
Carter paid back $800 to his father at the end of four years. What was the
average annual compound rate of interest on Carter’s loan from his father?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

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39. Today, David Bacus invested $3,000 for his one-year-old daughter. He
intends to use this fund for her education 17 years from now. He estimates he
will need $40,000 at that time. What average annual compound rate of return
will David need to achieve his goal?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

3–6 Calculate the periodic payment for a given situation.

40. Beth Pennington purchased an automobile for $14,500. She is financing the
auto at 14%, compounded monthly, for three years. What payment is
required at the end of each month to finance Beth’s auto?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

41. Jackson Hollis wants to purchase a new automobile in four years. He expects
to spend $18,000 for the car. If he earns an annual compound rate of return of
9% on his investments, how much should he invest at the end of each year to
achieve his objective?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  79
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42. Gil Ness purchased a home for $120,000. He is financing the home at 7.5%,
compounded monthly, for 30 years. What payment is required at the end of
each month to finance Gil’s home?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

43. William Smith wants to purchase a speedboat in three years for $16,000.
What periodic payment should he invest at the beginning of each quarter to
attain the goal if he can earn a 13% APR, compounded quarterly, on
investments?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

44. Eugene Swift has received an inheritance of $125,000. He wants to withdraw

equal periodic payments at the beginning of each month for the next five
years. He expects to earn a 13.5% APR, compounded monthly, on his
investments. How much can he receive each month?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

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45. Norm Fisk has an option to receive $100,000 today or receive equal periodic
payments at the beginning of each of the next nine years, including this year,
from a trust. His opportunity cost on investments is 11.75% compounded
annually. What annual payment should Norm receive to equal the $100,000
lump-sum payment today?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

46. Julie Schulz wants to accumulate $125,000 for retirement in seven years. She
expects to earn an average annual compound return of 9%, compounded
semiannually, on investments. How much should Julie invest at the
beginning of each six-month period to attain her goal?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

47. Vicki Jason wants to purchase a home eight years from now. She anticipates
needing $95,000 at that time. To attain this goal, how much should Vicki
invest at the end of each six-month period if she expects to earn a 12%
annual compound rate of return, compounded semiannually, on her
investments?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  81
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 3–7 Calculate the present value for an inflation-adjusted payment.

48. Cheryl Cooper wants to receive the equivalent of $30,000 in today’s dollars
at the beginning of each year for the next seven years. She assumes that
inflation will average 4% over the long run and that she can earn a 9%
compound annual return on investments. What lump sum does Cheryl need
to invest today to achieve her goal?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

49. Laurie and Sam Simpson are ready to retire. They want to receive the
equivalent of $25,000 in today’s dollars at the beginning of each year for the
next 20 years in addition to their other sources of income. They assume that
inflation will average 6% over the long run and that they can earn a 9%
compound annual return on investments. What lump sum do Laurie and Sam
need to invest today to attain their goal?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

50. Joel Winters wants to receive the equivalent of $70,000 in today’s dollars at
the beginning of each year for the next 10 years. He assumes that inflation
will average 10% over the long run and that he can earn a 7% compound
annual return on investments. What lump sum does Joel need to invest today
to fund his needs?
a. What value is sought in this problem?
Go to answer.

82  Introduction to the Time Value of Money

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 b. Compute the value.

Go to answer.

51. Joyce Albertson wants to receive the equivalent of $40,000 in today’s dollars
at the beginning of each year for the next 15 years. She assumes that inflation
will average 5% over the long run and that she can earn a 10% compound
annual return on investments. What lump sum is required to fund her needs?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.
52. Stuart Chaplin needs an income stream equivalent to $30,000 in today’s
dollars at the beginning of each year for the next 12 years to maintain his
standard of living. He assumes that inflation will average 5% over the long
run and that he can earn a 7% compound annual return on investments. What
lump sum does Stuart need to invest today to fund his needs?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

53. In considering her life insurance needs, Marilyn Ross has determined that, in
the event of her death, her dependents will need to receive a payment of
$40,000 in today’s dollars at the beginning of each year for the next 25 years.
If she assumes an inflation rate of 6% and a yield of 8%, what is the present
value of this payment stream?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  83
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
54. In considering his life insurance needs, John Cantrell has determined that, in
the event of his death, his dependents will need $28,800 in today’s dollars at
the beginning of each year. This payment will be needed until his youngest
child reaches age 18, which is 15 years from now. If he assumes an inflation
rate of 5% and a yield of 8%, what is the present value of these payments?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

3–8 Calculate the inflation-adjusted payment for a future sum.

55. Joanna Kopps, age 45, wants to quit working in three years. In terms of
today’s dollars, she needs an additional $500,000 in three years to have
sufficient funds to finance this objective. She assumes that inflation will
average 3% over the long run and that she can earn a 9% compound annual
return on investments. What serial payment should Joanna invest at the end
of the first year?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

c. Calculate the dollar amount of the payment at the end of

Year 2:

Year 3:
Go to answer.

84  Introduction to the Time Value of Money

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56. John Butler wants to start his own business in four years. He needs to
accumulate $175,000 in terms of today’s dollars to sufficiently finance his
business in four years. He assumes that inflation will average 5% and that he
can earn a 9% compound annual return on investments. What serial payment
should John invest at the end of the first year to attain his goal?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

c. Calculate the dollar amount of the payment at the end of

Year 2:

Year 3:

Year 4:

Go to answer.

57. Judy and Charles Okland want to retire in 12 years, at which time they would
like to have accumulated $350,000 in today’s dollars. To achieve this goal,
they plan to invest a sum at the end of each year that will remain constant in
purchasing power. If they anticipate average inflation of 6% and investment
earnings of 9%, what payment is required at the end of the first year?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

Module Review  85
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 c. Calculate the dollar amount of the payment at the end of

Year 2:

Year 3:

Year 4:

Year 5:

Year 6:

Year 7:

Year 8:

Year 9:

Year 10:

Year 11:

Year 12:

Go to answer.

58. Sally Steppel wants to retire in five years. In terms of today’s dollars, she
needs an additional $325,000 in five years to sufficiently finance her
objective. She assumes that inflation will average 6% over the long run and
that she can earn a 10% compound annual return on investments. What serial
payment should Sally invest at the end of this year to attain her objective?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

86  Introduction to the Time Value of Money

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 c. Calculate the dollar amount of the payment at the end of

Year 2:

Year 3:

Year 4:

Year 5:
Go to answer.

59. James Clark wants to retire in seven years. In terms of today’s dollars, he
needs an additional $250,000 in seven years to have sufficient funds to
finance this objective. He assumes that inflation will average 8% over the
long run and that he can earn a 5% compound annual return on investments.
What serial payment should James invest at the end of the first year to attain
his objective?
a. What value is sought in this problem?
Go to answer.

b. Compute the value.

Go to answer.

c. Calculate the dollar amount of the payment at the end of

Year 2:
Year 3:
Year 4:
Year 5:
Year 6:
Year 7:
Go to answer.

Module Review  87
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 3–9 Determine the general result when one parameter in a time value of
money calculation is changed.

60. The Harpers are saving on a monthly basis for retirement, hoping to retire in
five years. Their goal was to have $400,000 by making payments of
$5,587.15 at the end of each month. They thought they could earn a 7% rate
of return, but their investments haven’t done so well. They now realize that
6% is a more realistic return expectation. What change should the Harpers
make to their monthly savings to still reach their goal in five years?
a. What value is sought in this problem?
Go to answer.

b. Do you expect the value to increase or decrease?

Go to answer.

c. Compute the value.

Go to answer.

61. Tom Marshall originally expected to retire in eight years, but he has since
changed his mind and now wants to retire in 10 years. He has been saving on
a quarterly basis with a goal of having $500,000. What change might Tom
make to his retirement savings program if the dollar goal remains the same?
Go to answer.

62. Greg White had planned to purchase a condominium in four years. However,
because he has just gotten married, he now plans to buy a house instead. He
planned to save $2,300 per year toward a down payment of $10,000; his
savings were going to be in a CD paying 5.6%. If Greg now needs a down
payment of $15,000 in four years, what variables affect his decision? How
can these variables be realistically manipulated to meet his goal?
Go to answer.

88  Introduction to the Time Value of Money

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63. Andrew and Angela are buying a house valued at $374,900. They have been
saving for some time and are planning to put 20% down toward the house.
They are looking at two mortgages: one for 30 years with an interest rate of
4.74%, and one for 20 years with a rate of 3.27%. They are interested in
lower payments, but also shorter terms. What is the difference in the interest
that will be paid between these two mortgages in the first year?
Go to answer.

64. Tom and Jan Paisley have just purchased their first house for $192,000 with
a $40,000 down payment. They have taken out a 30-year mortgage with a
4.26% interest rate. By how much additionally will they reduce the principal
balance paid on their house at the end of 10 years if they pay $500 extra each
month during the first 10 years of ownership?
Go to answer.

Module Review  89
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Answers
3–1 Calculate the capitalized value of a given income.

1. David Charles wants to establish a scholarship fund for his alma mater. He
wants the fund to provide $15,000 per year to qualified students. Calculate
how much he will need to have in the fund to provide that amount of money
each year, using interest only, assuming the fund earns 6% annually.
a. What value is sought in this problem?
capitalized value of $15,000
Return to question.

b. Compute the value.

N I/YR PV PMT FV

6% $15,000

15,000 ÷ .06 = $250,000

Return to question.

2. In addition to her expected retirement income, Deborah Fairn wants some

extra spending money when she retires. She expects that the fund she wants
to set up for this purpose will earn 5% annually, conservatively. How much
will she need to have in the fund at retirement in order to have $3,000 per
year to spend?
a. What value is sought in this problem?
capitalized value of $3,000
Return to question.

90  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 b. Compute the value.
N I/YR PV PMT FV

5% $3,000

3,000 ÷ .05 = $60,000

Return to question.

3–2 Calculate the future value for a given situation.

3. Today, Sol Gibson purchased an investment-grade diamond for $50,000. He

expects it to increase in value at a rate of 15%, compounded annually, for the
next five years. How much will his diamond be worth at the end of the fifth
year if his expectations are correct?
a. What value is sought in this problem?
FV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

5 15% $50,000 NA ?

1, [SHIFT], P/YR
5, N
15, I/YR
50,000, +/–, PV
FV
$100,567.86
Return to question.

Module Review  91
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
4. Sophie Armstrong has been investing $1,000 at the end of each year for the
past 15 years. How much has accumulated, assuming she has earned 9%,
compounded annually, on her investment?
a. What value is sought in this problem?
FV (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

15 9% NA $1,000 ?

1, [SHIFT], P/YR
15, N
9, I/YR
1,000, +/–, PMT
FV
$29,360.92
Return to question.

5. Gloria Baker invested $14,000 in an interest-bearing account earning a 13%

annual rate, compounded monthly. How much will be in her account at the
end of eight years?
a. What value is sought in this problem?
FV (single sum)
Return to question.

92  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 b. Compute the value.

N I/YR PV PMT FV

96 13% $14,000 NA ?

12, [SHIFT], P/YR

8, [SHIFT], ×P/YR (96)
13, I/YR
14,000, +/–, PV
FV
$39,388.12
Return to question.

6. Leon Caine invested $35,000 in an account earning an 11.5% annual rate,

compounded quarterly. How much will be in his account at the end of seven
years?
a. What value is sought in this problem?
FV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

28 11.5 $35,000 NA ?
4, [SHIFT], P/YR

7, [SHIFT], ×P/YR (28)

11.5, I/YR

35,000, +/– PV

FV

$77,400.51
Return to question.

Module Review  93
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
7. In January 2006 Jeff Gills loaned $10,000 to his son at 9% interest,
compounded annually and payable upon termination of the loan. When his
son repaid the loan in January 2010, how much did Jeff receive?
a. What value is sought in this problem?
FV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

4 9% $10,000 NA ?

1, [SHIFT], P/YR
4, N
9, I/YR
10,000, +/–, PV
FV
$14,115.82
Return to question.

8. Margaret Fowler wants to accumulate $70,000 for a down payment on a

home in four years. She can invest $1,100 at the beginning of every month
for the next four years. She expects to earn 12% per year, compounded
monthly, on investments. Will she be able to attain her goal?
a. What value is sought in this problem?
FV (AD)
Return to question.
b. Compute the value.
This is an unusual question in that the future value is actually
given. However, the question asks if she can meet her goal. Since
her goal is to end up with $70,000, it makes sense to calculate the
FV based on the other variables. However, you can calculate the

94  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 number of compounding periods to determine if it can be done in
the desired time frame, calculate the interest to determine what
rate is needed, or calculate the payment to see if $1,100 is
adequate.

N I/YR PV PMT FV

4 12% NA $1,100 $70,000

[SHIFT], BEG/END (BEGIN)

12, [SHIFT], P/YR
4, [SHIFT], ×P/YR
12, I/YR
1,100, +/–, PMT
FV
$68,018.32; she will not meet her goal of $70,000
Return to question.

9. Marty and Jane Fisher have been investing $10,500 at the end of each six-
month period to accumulate funds for retirement. They plan to retire in 12.5
years and have been earning an 8% annual rate, compounded semiannually,
on their investments. How much will they have accumulated at retirement?
a. What value is sought in this problem?
FV (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

12.5 8% NA $10,500 ?
2, [SHIFT], P/YR
12.5, [SHIFT], ×P/YR
8, I/YR

Module Review  95
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 10,500, +/–, PMT
FV
$437,282.04
Return to question.

10. Christie Moore has been dollar cost averaging in a mutual fund by investing
$2,200 at the end of every quarter for the past seven years. She has been
earning an average annual compound return of 9%, compounded quarterly,
on this investment. How much is the fund worth today?
a. What value is sought in this problem?
FV (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

7 9% NA $2,200 ?
4, [SHIFT], P/YR
7, [SHIFT], ×P/YR
9, I/YR
2,200, +/–, PMT
FV
$84,533.29
Return to question.

11. Tracey Bergen purchased $75,000 worth of gold coins nine years ago. The
coins have appreciated at a rate of 4.5%, compounded annually, over the last
nine years. How much are the coins worth today?
a. What value is sought in this problem?
FV (single sum)
Return to question.

96  Introduction to the Time Value of Money

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 b. Compute the value.
N I/YR PV PMT FV

9 4.5% $75,000 NA ?

1, [SHIFT], P/YR
9, N
4.5, I/YR
75,000, +/–, PV
FV
$111,457.14
Return to question.

12. Dale Sword invested $45,000 in a mutual fund. He expects the fund to earn a
10.25% annual rate of return, compounded monthly, over the next 3½ years.
How much will be accumulated at the end of 3½ years if Dale’s expectations
are correct?
a. What value is sought in this problem?
FV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

3.5 10.25% $45,000 NA ?

12, [SHIFT], P/YR

3.5, [SHIFT], ×P/YR

10.25, I/YR

45,000, +/–, PV

FV

$64,321.18
Return to question.

Module Review  97
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
13. Sophie Armstrong has been investing $1,000 at the beginning of each year
for the past 15 years. How much has she accumulated, assuming she has
earned 9%, compounded annually, on her investment?
a. What value is sought in this problem?
FV (AD)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

15 9% NA $1,000 ?
[SHIFT], BEG/END (BEGIN)
1, [SHIFT], P/YR
15, N
9, I/YR
1,000, +/–, PMT
FV
$32,003.40
Return to question.

3–3 Calculate the present value for a given situation.

14. Sarah Long wants to give her daughter $20,000 to start her own business in
eight years. How much should she invest today at an annual interest rate of
6%, compounded annually, to have $20,000 in eight years?
a. What value is sought in this problem?
PV (single sum)
Return to question.

98  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 b. Compute the value.
N I/YR PV PMT FV

8 6% ? NA $20,000
1, [SHIFT], P/YR
8, N
6, I/YR
20,000, +/–, FV
PV
$12,548.25
Return to question.

15. Max Simpson wants to deposit a sum today that will be entirely dissipated in
eight years. He wants to withdraw $1,200 at the beginning of every six-
month period and expects to earn an annual 11%, compounded semiannually,
on investments. How much does Max need to deposit today?
a. What value is sought in this problem?
PV (AD)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

8 11% ? $1,200 NA

[SHIFT], BEG/END (BEGIN)

2, [SHIFT], P/YR
8, [SHIFT], ×P/YR
11, I/YR
1,200, +/–, PMT
PV
$13,245.10
Return to question.

Module Review  99
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
16. Rosemary Wilken wants to accumulate $75,000 in 6½ years to purchase a
houseboat. She expects an annual rate of return of 11.5%, compounded
quarterly. How much does Rosemary need to invest today to attain her goal?
a. What value is sought in this problem?
PV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

6.5 11.5 ? NA $75,000

4, [SHIFT], P/YR
6.5, [SHIFT], ×P/YR
11.5, I/YR
75,000, FV
PV
$35,892.62
Return to question.

17. Karen Jones, who was injured in an automobile accident, won a judgment
that provides her $1,200 at the end of each six-month period over the next six
years. If the escrow account that holds Karen’s settlement award earns an
average annual rate of 10.5%, compounded semiannually, how much was the
defendant initially required to pay Karen to compensate for her injuries?
a. What value is sought in this problem?
PV (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

6 10.5% ? $1,200 NA

100  Introduction to the Time Value of Money

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 [SHIFT], BEG/END (END)
2, [SHIFT], P/YR
6, [SHIFT], ×P/YR
10.5, I/YR
1,200, +/–, PMT
PV
$10,487.51
Return to question.

18. Lois Wiley expects to receive $100,000 from a trust fund in nine years. What
is the current value of this fund if it is discounted at 8%, compounded
semiannually?
a. What value is sought in this problem?
PV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

9 8% ? NA $100,000

2, [SHIFT], P/YR
9, [SHIFT], ×P/YR
8, I/YR
100,000, FV
PV
$49,362.81
Return to question.

Module Review  101

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
19. Elizabeth Becker has a balloon payment of $40,000 that is due in four years.
If she can make the lump-sum payment today, how much should she offer if
she discounts the loan at a rate of 10%, compounded annually, for four
years?
a. What value is sought in this problem?
PV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

4 10% ? NA $40,000

1, [SHIFT], P/YR
4, N
10, I/YR
40000, +/–, FV
PV
$27,320.54
Return to question.

20. Cindy Nichols wants to withdraw $700 at the beginning of each month for
the next three years. She expects to earn a 10% APR, compounded monthly,
on her investments. What lump sum should Cindy deposit today?
a. What value is sought in this problem?
PV (AD)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

3 10% ? $700 NA

102  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 [SHIFT], BEG/END (BEGIN)
12, [SHIFT], P/YR
3, [SHIFT], ×P/YR
10, I/YR
700, PMT
PV
$21,874.65
Return to question.

21. Stan and Robin Payne want to accumulate $30,000 in 3½ years to use as a
down payment on a home. They expect to earn a 7.25% annual rate,
compounded quarterly, on their investment. How much do the Paynes need
to invest today to attain their goal?
a. What value is sought in this problem?
PV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

3.5 7.25% ? N/A $30,000

4, [SHIFT], P/YR
3.5, [SHIFT], ×P/YR
7.25 I/YR
30,000, FV
PV
$23,329.52
Return to question.

Module Review  103

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
22. Jodi Cook expects to receive an inheritance of $95,000 in three years. Her
opportunity cost on investments is 8%, compounded annually. What would
the inheritance be worth to Jodi today if she could get it?
a. What value is sought in this problem?
PV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

3 8% ? N/A $95,000

1, [SHIFT], P/YR
3, N
8, I/YR
95,000, FV
PV
$75,414.06
Return to question.

23. Mickey Dodge expects to receive $57,000 in four years. His opportunity cost
on investments is an annual rate of 9%, compounded monthly. What is this
sum worth to Mickey today?
a. What value is sought in this problem?
PV (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

4 9% ? N/A $57,000

104  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 12, [SHIFT], P/YR
4, [SHIFT], ×P/YR

9, I/YR

57,000, FV

PV

$39,821.01
Return to question.

24. Robert Fine expects to receive $3,000 at the end of each of the next four
years. His opportunity cost on investments is 12%, compounded annually.
What is this sum worth to Robert today?
a. What value is sought in this problem?
PV (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

4 12% ? $3,000 N/A

1, [SHIFT], P/YR
4, N

12, I/YR

3,000, PMT

PV

$9,112.05
Return to question.

Module Review  105

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
25. Jana Hamill wants to withdraw $1,000 at the beginning of each year for the
next six years. She expects to earn 10.5%, compounded annually, on her
investment. What lump sum should Jana deposit today?
a. What value is sought in this problem?
PV (AD)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

6 10.5% ? $1,000 N/A

[SHIFT], BEG/END (BEGIN)

1, [SHIFT], P/YR
6, N
10.5, I/YR
1,000, PMT
PV
$4,742.86
Return to question.

26. Francis Kettering’s car payments, including principal and interest, are $300
at the end of each month. He has a three-year note with a 14% interest rate,
compounded monthly. What was the amount of Francis’s original note?
a. What value is sought in this problem?
PV (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

3 14% ? $300 N/A

106  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 12, [SHIFT], P/YR

3, [SHIFT], ×P/YR
14, I/YR
300, +/–, PMT
PV
$8,777.67
Return to question.

27. Helen Johnson will receive $500 at the beginning of every month for the next
four years. Her opportunity cost on investments is 14%, compounded
monthly. What is this stream of payments worth to Helen today?
a. What value is sought in this problem?
PV (AD)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

4 14% ? $500 N/A

[SHIFT], BEG/END (BEGIN)
12, [SHIFT], P/YR
4, [SHIFT], ×P/YR
14, I/YR
500, PMT
PV
$18,510.74
Return to question.

Module Review  107

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
28. Lori McCormick will receive $25,000 in lottery winnings at the end of each
year for the next seven years. Her opportunity cost on investments is 11.75%,
compounded annually. What is this sum worth to Lori today?
a. What value is sought in this problem?
PV (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

7 11.75% ? $25,000 N/A

1, [SHIFT], P/YR
7, N
11.75, I/YR
25,000, +/–, PMT
PV
$115,004.11
Return to question.

3–4 Calculate the number of compounding periods for a given situation.

29. Joseph Baldwin’s grandfather opened a $500 savings account for Joseph
when he was born, and the account now has a value of $1,800.
Approximately how old is Joseph if the deposit has been accumulating at an
annual rate of 4%, compounded annually?
a. What value is sought in this problem?
N (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

? 4% $500 N/A $1,800

108  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 1, [SHIFT], P/YR

4, I/YR
500, +/–, PV
1,800, FV
N
32.66 years (33 on HP 12C)
Return to question.

30. Carol McCartney purchased a plot of unimproved land for $2,500 last week.
Her real estate agent was confident the land would appreciate at an average
annual compound rate of 15.5%. Carol wants to sell the land for $7,500.
Approximately how many years must she own the property to receive $7,500
when she sells it?
a. What value is sought in this problem?
N (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

? 15.5% $2,500 N/A $7,500

1, [SHIFT], P/YR
15.5, I/YR
2500, +/–, PV
7500, FV
N
7.62 years (8 on HP 12C)
Return to question.

Module Review  109

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
31. Several years ago Clarence Watt purchased a rug for $5,000 when he was in
the Middle East. Today he sold the rug for $12,250. Clarence estimates the
average annual compound rate of return on the rug was 14%. Approximately
how many years did Clarence own the rug?
a. What value is sought in this problem?
N (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

? 14% $5,000 N/A $12,250

1, [SHIFT], P/YR
14, I/YR
5000, +/–, PV
12,250, FV
N
6.84 years (7 on HP 12C)
Return to question.

32. Today, Paul Rommel put $1,000 into an account earning an annual interest
rate of 8%, compounded monthly. Assuming he makes no withdrawals or
additional payments regarding this account, approximately how many years
must Paul wait for his account to increase in value to $2,000?
a. What value is sought in this problem?
N (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

? 8% $1,000 N/A $2,000

110  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 12, [SHIFT], P/YR
8, I/YR
1,000, +/–, PV
2,000, FV
N
÷
12 =
8.69 years (8.75 on HP 12C)
Return to question.

33. Brad Winstone wants to save $60,000 to open his own law practice. He
recently received an inheritance of $15,000,which he can invest at an 8%
APR, compounded semiannually. If this is the only investment he can make
toward his goal, approximately how many years will it be before Brad has
$60,000?
a. What value is sought in this problem?
N (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

? 8% $15,000 N/A $60,000

2, [SHIFT], P/YR
8, I/YR
15,000, +/–, PV
60,000, FV
N
÷
2=
17.67 years (18 on HP 12C)
Return to question.

Module Review  111

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 3–5 Calculate the interest rate per compounding period for a given
situation.

34. Lucy Aims invested $8,000 in a certificate of deposit (CD). In three years,
when the CD matures, Lucy will receive $12,000. If interest is compounded
weekly, what is the average annual compound rate of return on the CD?
a. What value is sought in this problem?
I (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV
3 ? $8,000 N/A $12,000

52, [SHIFT], P/YR

3, [SHIFT], ×P/YR
8,000, +/–, PV
12,000, FV
I/YR
13.53%
Return to question.

35. Betty Sims deposited $200 in a savings account at the end of each month for
four years, at which point she had accumulated $10,820. If interest was
compounded monthly, what was the average annual compound rate of return
on the account over the four-year period?
a. What value is sought in this problem?
I (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV
4 ? N/A $200 $10,820

112  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 12, [SHIFT], P/YR
4, [SHIFT], ×P/YR
200, +/–, PMT
10,820, FV
I/YR
6.00%
Return to question.
Note: The monthly deposit of $200 should be entered into the
calculator as a negative because the payment represents an
outflow for Betty Sims.

36. Victor Allen purchased 20 shares of an aggressive growth mutual fund at $85
per share six years ago. Today he sold all 20 shares for $3,200. What was the
average annual compound rate of return on his investment before taxes?
a. What value is sought in this problem?
I (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

6 ? $1700 NA $3,200
1, [SHIFT], P/YR

6, N
1,700, +/–, PV
3,200, FV
I/YR
11.12%
Return to question.

Module Review  113

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
37. Susan Mackey purchased a zero-coupon bond 4½ years ago for $625. If the
bond matures today and the face value is $1,000, what is the annual
compound rate of return that Susan realized on her investment if interest on
the bond is compounded semiannually?
a. What value is sought in this problem?
I (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

4.5 ? $625 NA $1,000

2, [SHIFT], P/YR
4.5, [SHIFT], ×P/YR

625, +/–, PV

1,000, FV

I/YR

10.72%
Return to question.

38. Carter Johnson borrowed $600 from his father to purchase a touring bicycle.
Carter paid back $800 to his father at the end of four years. What was the
average annual compound rate of interest on Carter’s loan from his father?
a. What value is sought in this problem?
I (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

4 ? $600 NA $800

114  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 1, [SHIFT], P/YR
4, N
600, +/–, PV
800, FV
I/YR
7.46%
Return to question.

39. Today, David Bacus invested $3,000 for his one-year-old daughter. He
intends to use this fund for her education 17 years from now. He estimates he
will need $40,000 at that time. What average annual compound rate of return
will David need to achieve his goal?
a. What value is sought in this problem?
I (single sum)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

17 ? $3,000 NA $40,000

1, [SHIFT], P/YR
N, 17
3,000, +/–, PV
40,000, FV
I/YR
16.46%
Return to question.

Module Review  115

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 3–6 Calculate the periodic payment for a given situation.

40. Beth Pennington purchased an automobile for $14,500. She is financing the
auto at 14%, compounded monthly, for three years. What payment is
required at the end of each month to finance Beth’s auto?
a. What value is sought in this problem?
PMT (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

3 14% $14,500 ? NA

[SHIFT], BEG/END (END)

12, [SHIFT], P/YR
3, [SHIFT], ×P/YR
14, I/YR
14,500, PV
PMT
–$495.58
Return to question.

41. Jackson Hollis wants to purchase a new automobile in four years. He expects
to spend $18,000 for the car. If he earns an annual compound rate of return of
9% on his investments, how much should he invest at the end of each year to
achieve his objective?
a. What value is sought in this problem?
PMT (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

4 9% NA ? $18,000

116  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 [SHIFT], BEG/END (END)
1, [SHIFT], P/YR
4, N
9, I/YR
18,000, FV
PMT
–$3,936.04
Return to question.

42. Gil Ness purchased a home for $120,000. He is financing the home at 7.5%,
compounded monthly, for 30 years. What payment is required at the end of
each month to finance Gil’s home?
a. What value is sought in this problem?
PMT (OA)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

30 7.5% $120,000 ? NA
[SHIFT], BEG/END (END)
12, [SHIFT], P/YR
30, [SHIFT], ×P/YR
7.5, I/YR
120,000, PV
PMT
–$839.06
Return to question.

Module Review  117

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
43. William Smith wants to purchase a speedboat in three years for $16,000.
What periodic payment should he invest at the beginning of each quarter to
attain the goal if he can earn a 13% APR, compounded quarterly, on
investments?
a. What value is sought in this problem?
PMT (AD)
Return to question.

b. Compute the value.

N I/YR PV PMT FV
3 13 NA ? $16,000
[SHIFT], BEG/END (BEGIN)
4, [SHIFT], P/YR
3, [SHIFT], ×P/YR
13, I/YR
16,000, FV
PMT

–$1,076.49
Return to question.

44. Eugene Swift has received an inheritance of $125,000. He wants to withdraw

equal periodic payments at the beginning of each month for the next five
years. He expects to earn a 13.5% APR, compounded monthly, on his
investments. How much can he receive each month?
a. What value is sought in this problem?
PMT (AD)
Return to question.

b. Compute the value.

N I/YR PV PMT FV
5 13.5% $125,000 ? NA

118  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 [SHIFT], BEG/END (BEGIN)

12, [SHIFT], P/YR

5, [SHIFT], ×P/YR

13.5, I/YR

125,000, PV

PMT

–$2,844.23
Return to question.

45. Norm Fisk has an option to receive $100,000 today or receive equal periodic
payments at the beginning of each of the next nine years, including this year,
from a trust. His opportunity cost on investments is 11.75%, compounded
annually. What annual payment should Norm receive to equal the $100,000
lump-sum payment today?
a. What value is sought in this problem?
PMT (AD)
Return to question.

b. Compute the value.

N I/YR PV PMT FV
9 11.75% $100,000 ? NA
[SHIFT], BEG/END (BEGIN)
1, [SHIFT], P/YR
9, N
11.75, I/YR
100,000, PV
PMT
–$16,635.25
Return to question.

Module Review  119

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
46. Julie Schulz wants to accumulate $125,000 for retirement in seven years. She
expects to earn an average annual compound return of 9%, compounded
semiannually, on investments. How much should Julie invest at the
beginning of each six-month period to attain her goal?
a. What value is sought in this problem?
PMT (AD)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

7 9% NA ? $125,000
[SHIFT], BEG/END (BEGIN)
2, [SHIFT], P/YR
7, [SHIFT], ×P/YR
9, I/YR
125,000, FV
PMT
–$6,318.22
Return to question.

120  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
47. Vicki Jason wants to purchase a home eight years from now. She anticipates
needing $95,000 at that time. To attain this goal, how much should Vicki
invest at the end of each six-month period if she expects to earn a 12%
annual compound rate of return, compounded semiannually, on her
investments?
a. What value is sought in this problem?
PMT (OA)
Return to question.
b. Compute the value.
N I/YR PV PMT FV
8 12% NA ? $95,000

2, [SHIFT], P/YR
8, [SHIFT], ×P/YR
12, I/YR
95,000, FV
PMT
–$3,700.45
Return to question.

Module Review  121

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 3–7 Calculate the present value for an inflation-adjusted payment.

48. Cheryl Cooper wants to receive the equivalent of $30,000 in today’s dollars
at the beginning of each year for the next seven years. She assumes that
inflation will average 4% over the long run and that she can earn a 9%
compound annual return on investments. What lump sum does Cheryl need
to invest today to achieve her goal?
a. What value is sought in this problem?
PVAD (serial payment)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

7 4.8077% ? $30,000 NA

[SHIFT], BEG/END (BEGIN)

1, [SHIFT], P/YR
7, N
1.09 ÷ 1.04 – 1 × 100 = 4.8077, I/YR
30,000, PMT
PV
-$183,211.73
Return to question.

49. Laurie and Sam Simpson are ready to retire. They want to receive the
equivalent of $25,000 in today’s dollars at the beginning of each year for the
next 20 years to supplement their other income sources. They assume that
inflation will average 6% over the long run and that they can earn a 9%
compound annual return on investments. What lump sum do Laurie and Sam
need to invest today to attain their goal?
a. What value is sought in this problem?
PVAD (serial payment)
Return to question.

122  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 b. Compute the value.
N I/YR PV PMT FV
20 2.8302% ? $25,000 NA
[SHIFT], BEG/END (BEGIN)
1, [SHIFT], P/YR
20, N
1.09 ÷ 1.06 – 1 × 100 = 2.8302, I/YR
25,000, +/–, PMT
PV
$388,537.73
Return to question.
50. Joel Winters wants to receive the equivalent of $70,000 in today’s dollars at
the beginning of each year for the next 10 years. He assumes that inflation
will average 10% over the long run and that he can earn a 7% compound
annual return on investments. What lump sum does Joel need to invest today
to fund his needs?
a. What value is sought in this problem?
PVAD (serial payment)
Return to question.
b. Compute the value.
N I/YR PV PMT FV
10 –2.7273% ? $70,000 NA

[SHIFT], BEG/END (BEGIN)

1, [SHIFT], P/YR
10, N
1.07 ÷ 1.10 – 1 × 100 = –2.7273, I/YR (since inflation exceeds the
rate of return, the calculated inflation-adjusted interest rate is
negative)
70,000, PMT
PV
-$795,256.10
Return to question.

Module Review  123

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
51. Joyce Albertson wants to receive the equivalent of $40,000 in today’s dollars
at the beginning of each year for the next 15 years. She assumes that inflation
will average 5% over the long run and that she can earn a 10% compound
annual return on investments. What lump sum is required to fund her needs?
a. What value is sought in this problem?
PVAD (serial payment)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

15 4.7619% ? $40,000 NA
[SHIFT], BEG/END (BEGIN)
1, [SHIFT], P/YR
15, N
1.10 ÷ 1.05 – 1 × 100 = 4.7619, I/YR
40,000, PMT
PV
-$442,042.59
Return to question.
52. Stuart Chaplin needs an income stream equivalent to $30,000 in today’s
dollars at the beginning of each year for the next 12 years to maintain his
standard of living. He assumes that inflation will average 5% over the long
run and that he can earn a 7% compound annual return on investments. What
lump sum does Stuart need to invest today to fund his needs?
a. What value is sought in this problem?
PVAD (serial payment)
Return to question.

124  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 b. Compute the value.
N I/YR PV PMT FV
12 1.9048% ? $30,000 NA

[SHIFT], BEG/END (BEGIN)

1, [SHIFT], P/YR
12, N
1.07 ÷ 1.05 – 1 × 100 = 1.9048, I/YR
30,000, +/–, PMT
PV
$325,202.39
Return to question.

53. In considering her life insurance needs, Marilyn Ross has determined that, in
the event of her death, her dependents will need to receive a payment of
$40,000 in today’s dollars at the beginning of each year for the next 25 years.
If she assumes an inflation rate of 6% and a yield of 8%, what is the present
value of this payment stream?
a. What value is sought in this problem?
PVAD (serial payment)
Return to question.

b. Compute the value.

N I/YR PV PMT FV
25 1.8868% ? $40,000 NA

[SHIFT], BEG/END (BEGIN)

1, [SHIFT], P/YR
25, N
1.08 ÷ 1.06 – 1 × 100 = 1.8868, I/YR
40,000, +/–, PMT
PV
$806,349.66
Return to question.

Module Review  125

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
54. In considering his life insurance needs, John Cantrell has determined that, in
the event of his death, his dependents will need $28,800 in today’s dollars at
the beginning of each year. This payment will be needed until his youngest
child reaches age 18, which is 15 years from now. If he assumes an inflation
rate of 5% and a yield of 8%, what is the present value of these payments?
a. What value is sought in this problem?
PVAD (serial payment)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

15 2.8571% ? $28,800 NA
[SHIFT], BEG/END (BEGIN)
1, [SHIFT], P/YR
15, N
1.08 ÷ 1.05 – 1 × 100 = 2.8571, I/YR
28,800, +/–, PMT
PV
$357,317.71
Return to question.

3–8 Calculate the inflation-adjusted payment for a future sum.

55. Joanna Kopps, age 45, wants to quit working in three years. In terms of
today’s dollars, she needs an additional $500,000 in three years to have
sufficient funds to finance this objective. She assumes that inflation will
average 3% over the long run and that she can earn a 9% compound annual
return on investments. What serial payment should Joanna invest at the end
of the first year?
a. What value is sought in this problem?
PMT (serial payment)
Return to question.

126  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 b. Compute the value.
N I/YR PV PMT FV

3 5.8252% NA ? $500,000

[SHIFT], BEG/END (END)

1, [SHIFT], P/YR
3, N
1.09 ÷ 1.03 – 1 × 100 = 5.8252, I/YR
500,000, FV
PMT
-$157,324.20 (current value of the payment) × 1.03 (inflation)
= $162,043.92
Return to question.

c. Calculate the dollar amount of the payment at the end of

Year 2:
-$162,043.92 × 1.03 = -$166,905.24

Year 3:
-$166,905.24 × 1.03 = -$171,912.40
Return to question.

56. John Butler wants to start his own business in four years. He needs to
accumulate $175,000 in terms of today’s dollars to sufficiently finance his
business in four years. He assumes that inflation will average 5% and that he
can earn a 9% compound annual return on investments. What serial payment
should John invest at the end of the first year to attain his goal?
a. What value is sought in this problem?
PMT (serial payment)
Return to question.

Module Review  127

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 b. Compute the value.
N I/YR PV PMT FV
4 3.81% NA ? $175,000

[SHIFT], BEG/END (END)

1, [SHIFT], P/YR
4, N
1.09 ÷ 1.05 – 1 × 100 = 3.8095, I/YR
175,000, FV
PMT
-$41,327.86 × 1.05 = -$43,394.25
Return to question.
c. Calculate the dollar amount of the payment at the end of
Year 2:
-$43,394.25 × 1.05 = -$45,563.97
Year 3:
-$45,563.97 × 1.05 = -$47,842.16
Year 4:
-$47,842.16 × 1.05 = -$50,234.27
Return to question.

57. Judy and Charles Oakland want to retire in 12 years, at which time they
would like to have accumulated $350,000 in today’s dollars. To achieve this
goal, they plan to invest a sum at the end of each year that will remain
constant in purchasing power. If they anticipate average inflation of 6% and
investment earnings of 9%, what payment is required at the end of the first
year?
a. What value is sought in this problem?
PMT (serial payment)
Return to question.

128  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 b. Compute the value.
N I/YR PV PMT FV
12 2.8302% NA ? $350,000
[SHIFT], BEG/END (END)
1, [SHIFT], P/YR
12, N
1.09 ÷ 1.06 – 1 × 100 = 2.8302, I/YR
350,000, FV
PMT
–$24,900.59 × 1.06 = -$26,394.63
Return to question.

c. Calculate the dollar amount of the payment at the end of

Year 2:
-$26,394.63 × 1.06 = -$27,978.31
Year 3:
-$27,978.31 × 1.06 = -$29,657.00
Year 4:
-$29,657.00 × 1.06 = -$31,436.42
Year 5:
-$31,436.42 × 1.06 = -$33,322.61
Year 6:
-$33,322.61 × 1.06 = -$35,321.97
Year 7:
-$35,321.97 × 1.06 = -$37,441.28
Year 8:
-$37,441.28 × 1.06 = -$39,687.76
Year 9:
-$39,687.76 × 1.06 = -$42,069.03

Module Review  129

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 Year 10:
-$42,069.03 × 1.06 = -$44,593.17
Year 11:
-$44,593.17 × 1.06 = -$47,268.76
Year 12:
-$47,268.76 × 1.06 = -$50,104.88
Return to question.

(Note: Slight variations may occur due to rounding. Always use an

interest rate carried to at least four places to the right of the
decimal point.)

58. Sally Steppel wants to retire in five years. In terms of today’s dollars, she
needs an additional $325,000 in five years to sufficiently finance her
objective. She assumes that inflation will average 6% over the long run and
that she can earn a 10% compound annual return on investments. What serial
payment should Sally invest at the end of this year to attain her objective?
a. What value is sought in this problem?
PMT (serial payment)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

5 3.7736% NA ? $325,000
[SHIFT], BEG/END (END)
1, [SHIFT], P/YR
5, N
1.10 ÷ 1.06 – 1 × 100 = 3.7736, I/YR
325,000, FV
PMT
-$60,275.94 × 1.06 = -$63,892.50
Return to question.

130  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 c. Calculate the dollar amount of the payment at the end of

Year 2:
-$63,892.50 × 1.06 = -$67,726.05

Year 3:
-$67,726.05 × 1.06 = -$71,789.61

Year 4:
-$71,789.61 × 1.06 = -$76,096.99

Year 5:
-$76,096.99 × 1.06 = -$80,662.81
Return to question.

59. James Clark wants to retire in seven years. In terms of today’s dollars, he
needs an additional $250,000 in seven years to have sufficient funds to
finance this objective. He assumes that inflation will average 8% over the
long run and that he can earn a 5% compound annual return on investments.
What serial payment should James invest at the end of the first year to attain
his objective?
a. What value is sought in this problem?
PMT (serial payment)
Return to question.

b. Compute the value.

N I/YR PV PMT FV

7 –2.7778% NA ? $250,000

[SHIFT], BEG/END (END)

1, [SHIFT], P/YR
7, N
1.05 ÷ 1.08 – 1 × 100 = –2.7778, I/YR (since inflation exceeds the
rate of return, the calculated inflation-adjusted interest rate is
negative)

Module Review  131

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 250,000, FV
PMT
-$38,802.19 × 1.08 = -$41,906.37
Return to question.

c. Calculate the dollar amount of the payment at the end of

Year 2:
-$41,906.37 × 1.08 = -$45,258.88

Year 3:
-$45,258.88 × 1.08 = -$48,879.59

Year 4:
-$48,879.59 × 1.08 = -$52,789.95

Year 5:
-$52,789.95 × 1.08 = -$57,013.15

Year 6:
-$57,013.15 × 1.08 = -$61,574.20

Year 7:
-$61,574.20 × 1.08 = -$66,500.14
Return to question.

3–9 Determine the general result when one parameter in a time value of
money calculation is changed.

60. The Harpers are saving on a monthly basis for retirement, hoping to retire in
five years. Their goal was to have $400,000 by making payments of
$5,587.15 at the end of each month. They thought they could earn a 7% rate
of return, but their investments haven’t done so well. They now realize that
6% is a more realistic return expectation. What change should the Harpers
make to their monthly savings to still reach their goal in five years?
a. What value is sought in this problem?
PMT (OA)
Return to question.

132  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 b. Do you expect the value to increase or decrease?
Increase
Return to question.

c. Compute the value.

N I/YR PV PMT FV

5 6% NA ? $400,000

[SHIFT], BEG/END (END)

12, [SHIFT], P/YR
5, [SHIFT], ×P/YR
6, I/YR
400,000, FV
PMT
$5,733.12 – $5,587.15 = -$145.97 per month increase
Return to question.

61. Tom Marshall originally expected to retire in eight years, but he has since
changed his mind and now wants to retire in 10 years. He has been saving on
a quarterly basis with a goal of having $500,000. What change might Tom
make to his retirement savings program if the dollar goal remains the same?
Since he has eight more compounding periods to reach his goal, Tom
can decrease the amount of his quarterly savings. Alternatively, Tom
can keep his savings amount the same but select an investment with
a lower rate of return (and probably less risk).
Return to question.

62. Greg White had planned to purchase a condominium in four years. However,
because he has just gotten married, he now plans to buy a house instead. He
planned to save $2,300 per year toward a down payment of $10,000; his
savings were going to be in a CD paying 5.6%. If Greg now needs a down
payment of $15,000 in four years, what variables affect his decision? How
can these variables be realistically manipulated to meet his goal?
Greg can increase the amount of his annual savings or increase the
rate of return on his investment. Unfortunately for Greg, at his present

Module Review  133

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 savings rate he would need to earn a return of over 33% to meet his
new goal of $15,000. If all else fails, Greg could always increase his
time horizon to about six years.
Return to question.

63. Andrew and Angela are buying a house valued at $374,900. They have been
saving for some time and are planning to put 20% down toward the house.
They are looking at two mortgages: one for 30 years with an interest rate of
4.74%, and one for 20 years with a rate of 3.27%. They are interested in
lower payments, but also shorter terms. What is the difference in the interest
that will be paid between these two mortgages in the first year?
Set the calculator for 12 payments per year or 12 p/yr. Be sure the
calculator is in End mode. A 20% down payment of $74,980 means
that Angela and Andrew financed the balance of $299,920 and this is
used as the PV in both calculations. Because we must first calculate
the regular monthly payment of the 30-year offer, it reads as follows,
N = 360 (or 30 years times 12 months per year). The interest or I/YR
= 4.74 and all that needs to be done is to calculate the payment or
PMT = $1,562.72. With the payment for the 30-year mortgage at
$1,562.72 per month, next press 1, followed by 12 [SHIFT] [AMORT].
Then press the [=] key and the calculator will show principal paid in
the first year of $4,636.26; interest paid is $14,116.35; and the
remaining balance is $295,283.74.
Calculate the payments for the 20-year mortgage. The 20-year
mortgage payment is calculated using $299,920 as PV; 240 = N; and
3.27 = I/YR; then press PMT and $1,704.72 is the monthly payment.
Once this is calculated, the amortization schedule should be
calculated. Press 1, followed by 12 [SHIFT] [AMORT], and then press
the [=] key and the calculator will show on the 20-year mortgage the
principal paid in the first year is $10,803.72; interest paid is $9,646.42;
and the remaining principal balance is $289,116.74. A quick
subtraction tells us that the total difference in interest paid between
the two in the first year $14,116.35 − $9,646.42 = $4,470.
Return to question.

134  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
64. Tom and Jan Paisley have just purchased their first house for $192,000 with
a $40,000 down payment. They have taken out a 30-year mortgage with a
4.26% interest rate. By how much additionally will they reduce the principal
balance paid on their house at the end of 10 years if they pay $500 extra each
month during the first 10 years of ownership?
Calculate the payment for the regular payment:
Set for 12 P/Yr
End Mode
PV = ($192,000 – $40,000) = $152,000
I/YR = 4.26
N = 360
Calculate the PMT = $748.64
1 [INPUT]
120 [SHIFT], [AMORT]
[=] Principal = $31,206.62
[=] Interest = $58,630.04
[=] Balance = $120,793.38

Now press the clear or [C] key

Press [PMT] key; should read $748.64; add $500 to this so it reads
$1,248.64 on the screen
Press the [PMT] key and follow the AMORT process again.
1 [INPUT]
120 [SHIFT], [AMORT]
[=] Principal = $105,849.74
[=] Interest = $43,986.91
[=] Balance = $46,150.26

$105,849 – $31,206 = $74,643

Return to question.

Module Review  135

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
References
Hall, Pamela L. Effective Use of a Financial Calculator, Orlando, FL: The
Dryden Press, Harcourt College Publishers, 2000.

Hewlett Packard. HP 10BII+ Financial Calculator User’s Guide. Hewlett

Packard, 2010.

136  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
About the Author
David Mannaioni, CFP®, CLU, ChFC, CPCU is an associate
professor at the College for Financial Planning. Utilizing his 30+
years of experience in the financial services industry, David also
maintains a financial planning practice where he works with his
clients in all areas of financial planning. In addition to his
certifications, David holds Life and Health insurance licenses in
several states, as well as the Series 6, Series 7, Series 63, and Series 24
registrations with FINRA. You can contact David at [Link]@[Link].

About the Author  137

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
Index
A master index covering all modules of this course can be found in the Self-Study
Examination book.

Amortization, 60 Present value and net present value of

unequal cash flows, 56
Calculators
Present value of a single sum, 25
Hewlett-Packard 10BII+, 15
Present value of an annuity, 31
Hewlett-Packard 12C, 18
Serial payments, 38
Capitalization of a number, 22
for a future sum, 45
Common calculation errors, 64
inflation-adjusted interest rate, 40
Common calculator mistakes, 12
present value of a serial payment, 39
entering rounded number, 14
Single sums combined with annuities,
helpful hints, 14
47
not clearing memory, 12
compounded periods calculation, 49
using default number of
future value calculation, 48
compounding periods, 13
periodic payment, 50
using wrong payment mode, 13
present value calculation, 49
Future value of a single sum, 23
rate of return, 51
Future value of an annuity, 32
Squares, square roots, and Nth roots, 59
Hewlett-Packard 10BII+ calculator, 15
Time value of money, 7
keys for basic TVM calculations, 16
amortization, 60
Hewlett-Packard 12C calculator, 18
capitalization of a number, 22
keys for basic TVM calculations, 19
future value of a single sum, 23
Internal Rate of Return, 54
future value of an annuity, 32
Number of compounding periods and
interest rate per compounding period, interest rate per compounding
27 period, 27
Periodic payment or receipt, 34 number of compounding periods, 28

138  Introduction to the Time Value of Money

© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.
 periodic payment or receipt, 34
present value of a serial payment, 39
present value of a single sum, 25
present value of an annuity, 31
relationships among the variables,
11
Rule of 72, 30
serial payment for a future sum, 45
single sums combined with
annuities, 47
solving problems, 10
squares, square roots, and nth roots,
59
unequal cash flows, 53
Unequal cash flows, 53
internal rate of return, 54
present value and net present value,
56

Index  139
© 1982, 1985, 1991, 1996, 2002–2015, College for Financial Planning, all rights reserved.