Loan Calculations with an HP Financial Calculator

I am not sure I can make you an expert on an HP10BII Financial Calculator on my Blog, but I can teach you one of the most basic functions which is solving for an unknown. The calculator can be purchased at an office store for around $25.

Generally in any transaction you need to find out a number that is not given to you. If, for instance you are given a loan amount, points, payment, future value, length of term and interest rate, it would seem that you know everything. You do from your side of the transaction, but you do not know what the bank is yielding. or what your actual interest rate is.

Loan Amount $700,000, 2 points, 7% interest, 25 yr period, Payment $4,947.45

We need to know what this is really costing us, what is the bank's yield.

Calculate the points. $700,000 X 2% = $14,000. You pay this up front to the bank, which means you don't really leave with $700,000, you get a check for $686,000. $700K - $14K in points. Your payment is based on $700K, but you only got $686K. This means the sooner you pay off the loan, the greater the yield to the bank.

If you calculate the IRR - Internal Rate of Return using your new calculator, it goes like this. Clear the Calculator. Shift C = Clear All.  Type 12 Shift P/YR for 'Twelve Payments per year'   Type 25 Shift XP/YR for 25 yrs times 12 payments = 300 periods will display.  Type 686000 PV Type 0 FV Type 4947.45 +/- PMT Solve for I by pressing the I/YR key. It will calculate 7.23 which is the yield to the bank on your 7% 25 year loan

You will probably not hold the investment until the end of 25 years. So we will calculate the yield assuming we paid it off in five years. As a shortcut we could use some of the numbers already in the calculator. But since I want to walk you through, without confusion, I will start at the beginning, and give you the exact keystrokes for this calculation.

Clear the Calculator. Shift C = Clear All. Type 12 Shift P/YR for 'Twelve Payments per year' Type 5 Shift XP/YR for 5 yrs times 12 payments = 60 periods will display. Type 700000 PV   Type 4947.45 +/- PMT   Type 7 I/YR    Solve for FV by pressing the FV key. It will calculate the payoff of the loan after five year. $638,135.35

Now with these numbers we can calculate the banks yield if you pay off the loan early.

Without clearing the calculator: Type FV this will stuff the above number into that field

Type 686000 PV  Type 4947.45 +/- PMT    Type 5 Shift XP/YR for 5 yrs times 12 payments = 60 periods will display     Press I/YR it will show the yield to the bank after 5 years 7.5%
Your 7% loan cost 7.5%, now you know how to do it yourself.  If you didn't get it, call me and I will do it for you.