Texas Instrument BA II Plus

Guide to TVM, Bond Valuation, and Stock Valuation

Calculator Guide for Time Value of Money The First Step: Resetting to Factory default and ...
Calculator Guide for Time Value of Money
Texas Instruments BAII PLUS Reset the calculator to factory default
Press Keys 2nd 2nd [Reset] ENTER [QUIT] Screen Display RST ? RST 0.00 0.00

Factory default resets among others: i) P/Y = C/Y= 12 , ii) PMT paid at the END of each period.

Setting payment and compounding frequency:

Enter Values 1 1 2nd Press Keys 2nd [P/Y] ENTER x ENTER [QUIT] Screen Display P/Y=12.00 default frequency P/Y=1.00 Once a year payment frequency C/Y= 1.00 C/Y= 1.00 Annual compounding 0.00
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Simon Pak & John Zdanowicz 2000

Five Keys: N, I/Y, PV, PMT, FV

q All TVM calculations deal with Five variables:
3 N: Maturity (years) 3 I/Y: Interest per Year (%) 3 PV: Present Value 3 PMT: Annuity, Periodic Payment 3 FV: Future Value

q Translate all TVM problems in terms of the five variables

T=0 T=1 T=2 T=3 . . . T=N-1 T=N

. PMT PMT PMT PV

. PMT PMT FV

Periodic Interest Rate: I/Y

Always Remember To CLEAR MEMORIES: 2nd + QUIT + 2nd + CLR TVM

Simon Pak & John Zdanowicz 2000

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FV, Yield, N
q If you deposit $1,000 today and earn 10% per year, what will be the amount in five years? N I/Y PV PMT FV 5 10 -1000 0 ? = 1610.51 q If you deposit $1,000 today and your deposit is expected to grow to $1,611.51 in five years, what is the yield? N I/Y PV PMT FV 5 ? =10 -1000 0 1610.51 q If you deposit $1,000 today and your deposit is expected to grow to $1,611.51 at 10% per year, how many years do you have to keep the money at the bank? N I/Y PV PMT FV ?=5 10 -1000 0 1610.51
Simon Pak & John Zdanowicz 2000

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PV, and PV of An Annuity

q The bank is offering 15% return on your deposit. If you want to have $1,000 in 20 years, how much do you have to deposit today? PV PMT FV ? 0 1000 = - 61.10 q If you receive $1,000 at the end of each year for the next five years, what is the PV of this annuity? Assume a discount rate of 10%. N I/Y PV PMT FV 5 10 ? 1000 0 = - 3,790.79
Simon Pak & John Zdanowicz 2000

N 20

I/Y 15

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An Annuity: FV, Yield

q If you deposit $1,000 at the end of each year for the next five years, and if you earn 10% per year, how much will you have accumulated in five years? PMT FV -1000 ? = 6,105.10 q If you deposit $1,000 at the end of each year for the next five years, and if you will have accumulated $6,105.10, what is the interest rate? N I/Y PV PMT FV 5 ? 0 -1000 6,105.10 = 10
Simon Pak & John Zdanowicz 2000

N 5

I/Y 10

PV 0

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An Annuity: PMT, N
q If you borrow $3,790.79 and promise to pay an equal amount annually for the next five years, what will be the annual payment if the interest rate is 10% N I/Y PV PMT FV 5 10 3,790.79 ? 0 = -1,000 q If you borrow $3,790.79 at 10% per year interest rate and promise to pay $1,000 per year, how many years do you have to pay for? N ? =5 I/Y PV PMT 10 3,790.79 -1000 FV 0

Simon Pak & John Zdanowicz 2000

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Ordinary Annuity vs Annuity Due

Ordinary Annuity: PMT at the END of each period 1 2 3 ... N-1 N PMT PMT PMT PV FV Annuity Due: PMT at the BEGINNING of each period 1 2 3 ... N -1 N PMT PMT PMT PMT PV
Simon Pak & John Zdanowicz 2000

...

PMT PMT

...

PMT FV

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Annuity Due: Payment at the beginning of each period

q If you leased your building at $150,000 per year for 10 years, what is the PV of the lease if the discount rate is 15%? First set the payment at the BEGINNING by using the following key combination: 2nd QUIT 2nd BGN 2nd SET 2nd QUIT (the
display should show BGN)

N 10

I/Y 15

PV PMT FV ? 150,000 0 = -865,737.59

After the calculation, remember to reset the payment at END of each period: 2nd QUIT 2nd BGN 2nd SET 2nd QUIT (the display
should show nothing)
Simon Pak & John Zdanowicz 2000

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Bond Valuation - Annual Payment

ABC Company issued a 10-year $1,000 bond. Coupon rate is 9% and paid annually and the $1,000 principal will be paid at the end of the tenth year. If the yield on a comparable bond is 7%, what will be the price of the bond?
The cash flows of the bond issued by ABC co.
0 1 2 . . . . 10

P?

$90

$90

$90 + $1,000

yield = 7% (0.07)

PVbond =

90 90 90 1000 + +K+ + = 1,140.47 2 10 1 + 0.07 (1 + 0.07 ) (1 + 0.07) (1 + 0.07)10

Calculator: i) Set P/Y = 1 using the key combination: 2nd, P/Y, 1, ENTER , 2nd, QUIT ii) Enter the data: 2nd, CLR TVM

N 10

I/Y 7

PV PMT FV ? 90 1,000 = -1,140.47

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Simon Pak & John Zdanowicz 2000

Bond Yield - Annual Payment

ABC Company issued a 10-year $1,000 bond. Coupon rate is 9% and paid annually and the $1,000 principal will be paid at the end of the tenth year. If the price of the bond is $1,140.47, what will be the yield to maturity?
The cash flows of the bond issued by ABC co.
0 1 2 . . . . 10

1,140.47

$90

$90 yield ?

$90 + $1,000

PVbond =

90 90 90 1000 + +K+ + = 1,140.47 10 1 + x (1 + x )2 (1 + x ) (1 + x )10

Calculator: i) Set P/Y = 1 using the key combination: 2nd, P/Y, 1, ENTER , 2nd, QUIT ii) Enter the data: 2nd, CLR TVM

N 10

I/Y PV ? -1,140.47 = 7.00

PMT FV 90 1,000
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Simon Pak & John Zdanowicz 2000

Bond Valuation - Semi-annual Payment

ABC Company issued a 10-year $1,000 bond. Coupon rate is 9% and paid semi-annually and the $1,000 principal will be paid at the end of the tenth year. If the yield on a comparable bond is 7%, what will be the price of the bond?
The cash flows of the bond issued by ABC co.
0 1 2 . . . . 20

P?

$45

$45

$45 + $1,000

yield = 7% (0.07), semi-annual yield = 3.5%

45 45 45 1000 PVbond = + +K+ + = 1,142.12 20 1 + 0.035 (1 + 0.035 )2 (1 + 0.035 ) (1 + 0.035 )20

Calculator: i) Set P/Y = 1 using the key combination: 2nd, P/Y, 1, ENTER , 2nd, QUIT ii) Enter the data: 2nd, CLR TVM

N 20

I/Y 3.5

PV PMT FV ? 45 1,000 = -1,142.12

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Simon Pak & John Zdanowicz 2000

Bond Yield - Semi-annual Payment

ABC Company issued a 10-year $1,000 bond. Coupon rate is 9% and paid semi-annually and the $1,000 principal will be paid at the end of the tenth year. If the price of the bond is $1,142.12, what is the yield on the bond?
PVbond =
The cash flows of the bond issued by ABC co.
0 1 2 . . . . 20

1,142.12

$45

$45 yield ?

$45 + $1,000

45 45 45 1000 + +K+ + = 1,142.12 2 20 1 + x (1 + x ) (1 + x ) (1 + x )20

Calculator: i) Set P/Y = 1 using the key combination: 2nd, P/Y, 1, ENTER , 2nd, QUIT ii) Enter the data: 2nd, CLR TVM

N 20

I/Y PV PMT FV ? -1,142.12 45 1,000 = 3.50 Semi-annual rate: Thus it is 3.5x2 =7% /year
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Simon Pak & John Zdanowicz 2000

Stock Valuation: Constant Dividend

q Common stocks have no maturity.
(The price of a share) = PV (all future dividends)
j = DIV DIV1 DIV2 j + + ... = 2 j 1 + r (1 + r) j =1 (1 + r) q Special Case 1: Constant dividends

P0 =

DIV1=DIV2=.......=DIV This is just an ordinary perpetuity. Therefore, the price of a share is:

P0 =

DIV r

Example: If XYZ Co. is expected to pay out dividends at $2 per year, what is
the price of the stock assuming the discount rate is 10%. ANS: P0 = $2 / 0.1 = $20
Simon Pak & John Zdanowicz 2000

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Stock Valuation: Growing Dividend

q Special Case 2: Gordon Model
Dividends expected to grow at constant rate, g < r: DIVt = DIV0 (1+g) t , t = 1 - 4 This is just a growing perpetuity. Therefore, the price of a share is:

P0 =

D0 (1 + g) D0 (1 + g)2 D (1 + g) D1 + +. . .= 0 = 2 1+ r (1 + r) r-g r-g

Example: Company A expects dividends $2 next year growing at 10% per year in subsequent years and the discount rate is 15%. What is the stock price for A today? Ans: Apply Gordon Model PA = 2/(0.15 - 0.10) = $40

Simon Pak & John Zdanowicz 2000

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Stock Valuation: Variable Growth Dividend

Example: The dividends for ABC stock are: DIV1 = $5, growing at g1=25%/year for three years and at g2 = 4% thereafter. The discount rate is r=12%. What is the price at t=0, P0?
Req'd Rate of Return r = 12% t=0 1 2 3 4 5 6 Div Growth rate 25% 25% 25% 4% 4% Div Amount $5.00 $6.25 $7.81 $9.77 $10.16 $10.56 P4 = Div5/(r-g2), GordonModel $126.95 CFs Raw 2 + Raw 3 $5.00 $6.25 $7.81 $136.72 PVs at t=0 of CFs $4.46 $4.98 $5.56 $86.89 P0 = $101.89 SUM of all PVs' Calculator TI BA II + : Use CF worksheet for CFs in raw 4

1 2 3 4 5

Simon Pak & John Zdanowicz 2000

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Calculator Guide for Uneven CFs Texas Instruments BAII PLUS

Present value of Uneven CF's (i =10%)
CF0 =0, CF1=$1,000, CF2= $600, CF3 = $400 CF 2nd 0 1000 [CLR Work] [ENTER]
x

CF0 = No. in mem Start CF worksheet CF0 = 0.00 Clear CF memory CF0 = 0.00 CF(t=0 ) = 0 C01 0.00 C01 = 1,000.00 CF(t=1 ) = 1,000 F01 = 1.00 C02 0.00 C02 = 600.00 CF(t=2 ) = 600 F02 = 1.00 C03 0.00 C03 = 400.00 CF(t=3 ) = 400

Example: UNEVEN CASH FLOWS Find the PV of a stream of cash flows (CFs): $1,000 in year 1, $600 in year 2, and $400 in year 3 assuming a discount rate of 10%.

[ENTER]
x x

$1,705.48

i = 10% 0 1 2 3

600

[ENTER]
x x

400 10

[ENTER] NPV [ENTER]

x

$1,000

$600

I = 0.00 I = 10.00 Interest rate 10% NPV = 0.00 NPV = 1,705.48 Answer 0.00 exit CF worksheet

CPT 2nd [QUIT]

Simon Pak & John Zdanowicz 2000

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Calculator Guide for TVM, Repeated CFs Texas Instruments BAII PLUS
Present value of CF's with repeated CFs(i =10%)
CF0 =0, 3,000 for Yr 1, 5,000 for Yr 2,3,4,5, and 4,000 for Yr 6 CF 2nd 0 3000 [CLR Work] [ENTER]
x

CF0 = No. in mem Start CF worksheet CF0 = 0.00 Clear CF memory CF0 = 0.00 CF(t=0 ) = 0 C01 0.00 C01 = 3,000.00 CF(t=1 ) = 3,000 F01 = 1.00 C02 0.00 C02 = 5,000.00 CF(t=2 ) = 5,000 F02 = 1.00 F02 = 4.00 $5k repeated 4 times C03 0.00 C03 = 4,000.00 CF(t=3 ) = 4,000 I = 0.00 I = 10.00 Interest rate 10% NPV = 0.00 NPV = 19,393.65 Answer 0.00 exit CF worksheet

[ENTER]
x x

Example: UNEVEN CASH FLOWS with repeated portion Find the PV of a stream of cash flows (CFs): $3,000 in year 1, $5,000 per year in years 2 to 5, and $4,000 in year 6 assuming a discount rate of 10%.
$19,393.65

5000 4 4000 10

[ENTER]
x

i = 10% 0 1 2 3 4 5 6

[ENTER]
x

$5,000

$5,000

[ENTER]
x

CPT 2nd [QUIT]

CF1

CF2=5000 repeated 4 times

CF3

Simon Pak & John Zdanowicz 2000

II.2 - 18

$4,000

NPV

$3,000

$5,000

$5,000

[ENTER]

$400