FIN 614: Financial Management
Larry Schrenk, Instructor
1. What are Non-Annual Cash Flows?
2. Valuing Non-Annual Cash Flows
1. Using P/Y
2. Adjusting the Interest Rate
Few Things are Paid Annually:
Cell Phone Bill
Monthly
Car Insurance
Quarterly
Retirement Contribution
Weekly, Every Two
Weeks, Monthly
(depending on your pay
period)
You save a total of $1,200 every year at
7%. How much do you have in 25 years?
Pattern A: Save 1,200 at the end of each year.
Answer:
Pattern B: Save 100 at the end of each month.
Answer:
Difference:
You save a total of $1,200 every year at
7%. How much do you have in 25 years?
Pattern A: Save 1,200 at the end of each year.
Answer: $75,898.85
Pattern B: Save 100 at the end of each month.
Answer:
Difference:
You save a total of $1,200 every year at
7%. How much do you have in 25 years?
Pattern A: Save 1,200 at the end of each year.
Answer: $75,898.85
Pattern B: Save 100 at the end of each month.
Answer: $81,007.17
Difference:
You save a total of $1,200 every year at
7%. How much do you have in 25 years?
Pattern A: Save 1,200 at the end of each year.
Answer: $75,898.85
Pattern B: Save 100 at the end of each month.
Answer: $81,007.17
Difference: $5,108.32 or 6.73%
Introducing ‘m’
Number of Periods in a Year
Period
Annual
Semiannual
Quarterly
Monthly
Weekly
Daily
m
1
2
4
12
52
365 or 360
Recall, N = Number of Periods (Not
Years)
Time
Period
m
N
3 years
Semiannual
2
25 years
Monthly
12
1½ years
Quarterly
4
6 (= 1½ x 4)
5 Quarters
Monthly
12
15 (= 12 + 3)
6 (= 3 x 2)
300 (= 25 x 12)
Compound or Discount at the Period
(Not the Annual) Interest Rate
Method 1: Change P/Y
Method 2: Adjust the Interest Rate
NOTE: These are doing exactly the same
thing, so it does not matter which you use.
In the TVM section, change P/Y to m:
N=0
I%=0
PV=0
PMT=0
FV=0
P/Y=1 ◄ Change to m
C/Y=1
PMT: END BEGIN
Adjustment
1. Find the Annual Interest Rate
2. Divide It by m.
3. Use the result for I%.
You save $100 every month at 7%. How much
do you have in 25 years?
N=300
I%=7
PV=0
PMT=-100
FV=0
P/Y=12
C/Y=12
(= 25 x 12)
◄ Select FV, then [ALPHA] [ENTER]
(= m)
(C/Y will automatically change to
the value of P/Y.)
PMT: END BEGIN
FV = 81,007.17
You save $100 every month at 7%. How much
do you have in 25 years?
N=300
(= 25 x 12)
I%=7/12
(= 7/12)
PV=0
PMT=-100
FV=0
◄ Select FV, then [ALPHA] [ENTER]
P/Y=1
(Do not change P/Y)
C/Y=1
PMT: END BEGIN
FV = 81,007.17
When you solve non-annual time or
interest rate problems, the answer is in
‘periods’.
I saved $100 monthly and have $1300 in my
account. If my rate of return was 10%, how long did
I hold the investment?
Answer: 12.39
When you solve non-annual time or
interest rate problems, the answer is in
‘periods’.
I saved $100 monthly and have $1300 in my
account. If my rate of return was 10%, how long did
I hold the investment?
Answer: 12.30 Months, NOT years
When you solve non-annual time or
interest rate problems, the answer is in
‘periods’.
I saved $100 monthly and have $1300 in my
account. If my rate of return was 10%, how long did
I hold the investment?
Answer: 12.30 Months, NOT years
FIN 614: Financial Management
Larry Schrenk, Instructor