Periods And Cash Flows; Simple And Compound Interest; Simple Interest - HP 10BII Owner's Manual

Periods and Cash Flows
In addition to the sign convention (cash flowing out is negative, cash
flowing in is positive) on cash flow diagrams, there are several more
considerations:
= The time line is divided into equal time intervals. The most common
period is a month, but days, quarters, and annual periods are also
common. The period is normally defined in a contract and must be
known before you can begin calculating.
m To solve a financial problem with the HP 10BII, all cash flows must
occur at either the beginning or end of a period.
m If morc than one cash flow occurs at the same place on the cash
flow diagram, they are added together or netted. For example, a
negative cash flow of $-250.00 and a positive cash flow of $750.00
occurring at the same time on the cash flow diagram are entered as a
$500.00 cash flow (750 — 250 = 500).
и A valid financial transaction must have at least one positive and one
negative cash flow.
Simple and Compound Interest
Financial calculations are based on the fact that money earns interest over
time. There are two types of interest: simple interest and compound.
interest. The basis for Time Value of Money and cash flow calculations is
compound interest.
Simple Interest
In simple-interest contracts, interest is a percent of the original principal.
The interest and principal are due at the end of the contract. For
example, say you loan $500 to a friend for a year, and you want to be
repaid with 10% simple interest. At the end of the year, your friend owes
you $550.00 (50 is 10% of 500). Simple interest calculations are done
using the @ key on your HP 10BII. An example of a simple interest
calculation is on page 98.
4: Picturing Financial Problems 47