Time Value Of Money; Introduction - HP -18C Owner's Manual

4
Time Value of Money
Introduction
The phrase
time value of money
describes calculations based on money
earning interest over a period of time. There are two types of interest:
• In
simple interest
calculations, the amount of interest is a percent of
the principal and is repaid in a lump sum. For example, if you lend
a friend $500.00 for a year and you want to be repaid with 6%
simple interest per year, your friend owes you $500
+
WlOO
x
$500)
=
$530. Simple interest calculations can be done using the
calculator line and the
00
key. Refer to page 36 .
• Compound interest
calculations take into account that interest, added
to the principal at specified
compounding periods,
also earns interest.
Many time value of money problems-for example, savings ac-
counts, mortgages, pension funds, leases, and annuities-are
compound interest calculations. Amortization calculations deter-
mine the amounts applied toward principal and interest in a
payment or series of payments.
4: Time Value of Money 55