How to Use a Financial Calculator

Financial calculators are specialized tools for business and finance. They include some necessary components that you won't find on a typical calculator that will make life much easier when you want to calculate the rate of return on an investment or loan payments, for example.

Whether you're using a hand-held calculator, an app on your computer or phone or an online financial calculator, there are five primary keys you should learn how to use.

Financial calculators are fundamentally different than standard calculators and even scientific calculators. Those working in finance need to solve different problems than scientists or mathematicians. A physicist, for example, never has to calculate bond yields or depreciation, while someone in finance seldom needs to use sine or cosine.

You can get calculators that offer different modes so that it can work as a financial calculator at times and can do scientific calculations at other times. Such calculators are available on your computer through the Windows Store. Before buying a multimode calculator, make sure it has the functions you will need.

In most cases, the most important functions for which to look in a financial calculator include payment calculations, determining the rate of return on investments and the current values of loans based on interest rates. There are also five important keys for which to look:

When you are about to select a field for the calculator to compute, you press the compute button (CPT) first. The CPT button is normally pressed before calculating a payment (PMT), number of periods (N), present value (PV), future value (FV) and interest rate period (I%).

For example, if you press the CPT button and then press the PMT button, the calculator will calculate the value for the payment.

Pressing the PMT button calculates the payments per period. This button is used in conjunction with the number of periods (N), the interest rate period (I%) and present value (PV) buttons.

This button is used for specifying the number of periods, such as the number of payments you would make in a loan. A five-year loan, for example, has 60 payment periods. You can enter the number of periods yourself or calculate the number of periods first, such as "5 x 12 =" to get the value of 60 before pressing the N button.

The interest rate per period button works in conjunction with the number of periods (N), present value (PV) and payment (PMT) buttons. The button may be labelled as I% for "interest percentage" or I/Y for "interest/yield."

Before entering the interest rate, be certain that you're using the rate being charged for each period. For example, if your payments are monthly, you should use a monthly interest rate, not the annual rate. You can enter the interest rate per period directly or do a calculation followed by the equal sign before pressing the I% button.

Use the present value (PV) and future value (FV) buttons when you want to enter the present or future value of a loan or an investment. These buttons are used in conjunction with the payments (PMT), number of periods (N) and interest rate per period (I%) buttons. They can also be used together, for example, to calculate the future value of a loan or investment based on the present value.

Some calculators, like the BAII Plus financial calculator by Texas Instruments, require that you enter some values as negatives. Other calculators, particularly online calculators or some phone apps, won't require you to do this.

This is because some calculators make a distinction between inflows and outflows of money. For example, if you are putting $20,000 into an investment, this is an outflow and should be entered as a negative number.

Like any other complex tool, there are bound to be significant differences between one calculator and another. On a small basic calculator, for example, you may have become accustomed to entering "0.10" for 10%. On even the most basic financial calculators, however, like the HP 12CP financial calculator, you should enter it simply as "10".

Some calculators will have arrow buttons that require you to scroll up or down through options to select a specific function. This is often the case with multifunction calculators, for example.

Regardless of which calculator you are using, always double check your calculations. During the first few days, it's actually not a bad idea to triple check them. You should also take a moment to consider if the answer your calculator returns to you looks right or not. If you get an error or if it says your rate of return is 1999.999999%, for example, you have probably entered something incorrectly.

Suppose you invested $1,000 into a mutual fund or bond fund that you expect to pay a 12 percent annual return over the next five years. To find out what the future value is:

Interest is paid annually, and the investment is for five years, so enter 5 and then press the N button.

Twelve percent interest is to be paid annually on this investment (or so you are estimating), so enter 12 and then press the I% button.

Enter 10000 and press the PV button. (Remember that this is an outflow, so you may need to enter -10000.)

Press CPT (compute) and then the FV button to compute the future value. The answer you get should be $1,762.34.

To calculate loan payments on a financial calculator, you will need to know the loan amount, interest rate, term of the loan and payment schedule.

As an example, if you wanted to calculate the monthly payment for a $10,000 five-year loan at 5 percent annual interest, you would do the following:

Enter 10000 and press the PV button for the amount of the loan, which is its present value.

Enter 5 / 12 and press = to get 4.1666667, which is the annual interest rate divided by 12 months. Press the I% button to enter the interest rate.

Enter 5 x 12 = to get 60, which is five years of monthly payments. Press the N button to enter 60 as the number of payments.

Press CPT and then press the PMT button. The calculator computes the monthly payment for your five-year loan, which is $188.71.

Imagine that you want to set up a college fund for your child, and you have set aside $20,000. You figure you will need about $100,000 in 15 years, so you need to know the compound interest rate or rate of return from a mutual fund to reach that amount.

Enter 20000 and press the PV button. This is the amount you are investing. As a cash outflow, you may need to enter this as a negative amount.

Enter 100,000 and press the FV button. This is how much you want your investment to be in the future.

Enter 15 and press the N button. This represents a period of 15 years.

Press the CPT button and then press the I% button to compute the required rate of return. The answer you get should be 11.326%.