Chapter 4.4® - Changing Advanced Function Keys (BGN, C/Y, P/Y), Converting from Nominal Interest to Effective Interest Rates using BAII Financial Calculator

• Part 4.1 - Time Value of Money, Future Values of Compounding Interest, Investing for more than 1 Period & Examination of Original Investment & Growth of Investment
• Part 4.2 - Compounding Interest Homework Problem & Time Value of Money Continued - Future Value Formula, Growth of $100 & Future Value Comparisons
• Part 4.3 - How to Use a Financial Calculator BAII Plus to Perform Time Value of Money & Present / Future Value Calculations
• Part 4.4 - Changing Advanced Function Keys (BGN, C/Y, P/Y), Converting from Nominal Interest to Effective Interest Rates using BAII Financial Calculator
• Part 4.5 - Examples of Interest Rate Calculations & Practice Questions #1 - #7
• Part 4.6 - Nominal to Effective Interest Rate Calculations & Practice Questions #8 - #16
• Part 4.7 - Present Value & Discounting – We Know the Future Value, how do we find the Present Value? Single Period Case & PV Discounting for Multiple Periods
• Part 4.8 - An Example of Present Value Discounting & Saving Up Money & Deriving the Basic Present Value Equation
• Part 4.9 - Determining the Discount Rate using Basic Present Value equation & Finding the Number of Accounting Periods
• Part 4.10 - Summary of Time Value Formulas & Calculations
• Part 4.11 - Discounted Cash Flow Valuations - Future Value of Multiple Cash Flows & Designing the Cash Flows Timeline
• Part 4.12 - Compound the Accumulated Balance Forward One Year at a Time - Discounted Cash Flow Valuation - Determining Present Value of Multiple Future Cash Flows & Designing a Financial Timeline
• Part 4.13 - Determining Present Value of Multiple Future Cash Flows – Homework Example
• Part 4.14 - Calculating Present Value with Multiple Future Cash Flows – Example #2
• Part 4.15 - Valuing Annuity Level Cash Flows – Present & Future Value of Annuities
• Part 4.16 - Calculating Annuity Payments using Annuity Present Value Factor – Example
• Part 4.17 - Accounting for Perpetuities & Using the Annuity Present Value Factor Formula
• Part 4.18 - Accounting for Growing Perpetuities & Simplified Formula for Present Value of Growing Perpetuity - Example of Growing Perpetuity on Rental Cash Flows

In some advanced calculations, you might have 4 periods in a year (quarterly) or just 2 periods in a year (semi-annual) or even 12 periods in a year (monthly). So far we have assumed our calculation above on 1 period a year (annual). Other calculations might require you to set monthly compounding instead of annual compounding. How do you deal with these changes?

Compounding of Interest per Period (C/Y) and Number of Periods per Year (P/Y)

Example 1: Say there are 4 periods per year, and monthly compounding. Do the following in your calculator:

i) Press 2nd I/Y

ii) P/Y = 4, press Enter then

iii) C/Y = 12, press Enter, then

iv) Once these entries have been made, exit from this area by pressing CE/C.

Interest Rate Conversion using BA II Plus Financial Calculator

This function is used for finding nominal and effective rates of interest, that are slightly different from each other.

Example: If 8% is compounded monthly, what is the effective rate of interest?

i) Press 2nd, and then press 2

ii) NOM = Press 8, Enter then

iii) EFF= This is the variable that needs to be calculated, so press to bypass it for now.

iv) C/Y = Press 12, then Enter, then

v) EFF = Press CPT

vi) Final Answer = 8.3%

Exercise Problems for Converting Nominal/Effective Interest Rates

1) Calculate the ANNUAL effective rate given a nominal interest rate of 8%

On your BA II plus financial calculator

i) Press 2nd, and then press 2

ii) NOM = Press 8, Enter then

iii) EFF= Press

iv) C/Y = Press 1, then Enter, then

v) EFF = Press CPT

vi) Answer = 8%

2) Calculate the SEMI-ANNUAL effective rate given a nominal interest rate of 8%

On your BA II plus financial calculator

i) Press 2nd, and then press 2

ii) NOM = Press 8, Enter then

iii) EFF= Press

iv) C/Y = Press 2, then Enter, then

v) EFF = Press CPT

vi) Answer = 8.16%

3) Calculate the QUARTERLY effective rate given a nominal interest rate of 8%

On your BA II plus financial calculator

i) Press 2nd, and then press 2

ii) NOM = Press 8, Enter then

iii) EFF= Press

iv) C/Y = Press 4, then Enter, then

v) EFF = Press CPT

vi) Answer = 8.24%

4) Calculate the MONTHLY effective rate given a nominal interest rate of 8%

On your BA II plus financial calculator

i) Press 2nd, and then press 2

ii) NOM = Press 8, Enter then

iii) EFF= Press

iv) C/Y = Press 12, then Enter, then

v) EFF = Press CPT

vi) Answer = 8.299% or round up to 8.3%