HOW TO WORK THE FINANCIAL CALCULATOR
MODEL LOAN: You are borrowing $100,000 at 10% interest payable over 30 Years.
To calculate the monthly payment on this loan we must put into the registers the three known numbers, viz. PV = $100,000, %i = 10%, and N = 30 years. Since the loan is fully amortizing, there is no need to use FV (we will use FV later when we play with balloon payments). These are the steps:
1. Clear the calculator of any other numbers that may be stored in the Financial Registers from previous calculations.
2. You may want to change the display to show only two decimal places in all your calculations. Otherwise, when you are figuring monthly percentages, the figures to the right of the decimal point will go on and on. You’ll see. Consult your manual to see how to do this.
3. Put 100000 into the calculator and push PV, the amount of the loan. This puts $100,000 into the PV Register.
4. To place the interest in the %i register you must find what the monthly interest is since we are looking for the monthly payment. Take 10 and divide it by 12 to get the monthly interest. 10 divided by 12 is 0.83. Push the %i button. You now have 0.83 in the %i register. (It is important to do the actual calculation. If you merely put .83 in the %i register you will get a slightly wrong answer. The reason is that the calculator carries all the decimals internally, and will use them when figuring the answer. If you put in .83 you are putting in an incorrect number. The correct number is .8333333333.) If your calculator automatically divides the interest by 12 you can skip this division.
5. To place the number of payments in the N register, you must find out how many months are needed to amortize the loan. We know it is 30 years, and to find the months we multiply 30 years by 12 months. This gives us 360 months to amortize the loan. Push the N button. You now have 360 in the N register.
If you could look into the 5 registers you would see these numbers:
N I PV PMT FV
360 10% $100,000 $0 $0
To calculate the monthly payment to amortize this loan push a compute key or the Pmt key depending on your calculator. Your calculator will, with luck, come up with 877.57. This amount will completely amortize or pay off a $100,000 loan at 10% annual interest in 30 years. Now that we have all the figures we need, let’s play with this a little.
1. Clear the calculator.
2. Put in the figure for N (360) , %i (10 ÷ 12= .83333333), and Pmt (877.57), and solve for PV (It should be 100000).
3. Clear the calculator again and put in the figure for N (360), Pmt (877.57), and PV (100000), and solve for %i (It should be .8333333333)
4. Clear the calculator again and put in the figure for %i (.83), Pmt (877.57) , and PV (100000), and solve for N (should be 360)
You already solved for Pmt up above. The point is that if you know at least three of the numbers, you can solve for the fourth every time. Further, it doesn’t even matter what order you use when you put the amounts in. For instance, in (1) above, you can enter the amounts beginning with N or %i or Pmt and follow it in any order at long as all three are entered. Isn’t that neat! There are other exercises on this site, just copy them and play with them. They are your key to profits in the investment business.