Student Question: END vs BEGIN Mode

For some reason my mind just went completely blank on how to enter compound interest in the financial calculator. On Problem Set #2, #2 I was thinking that I needed to find the nominal interest rate but then that didn't sound right. I was putting in the effective rate of 12% and the number 12 to get a nominal rate of 11.38655 which I didn't think was right.

Occasionally, we might need to change our calculators to BEGIN mode when cash flows occur at the beginning of a period. Again, you need to refer to your calculator manual to set it to BEGIN mode. Some calculators display a BEGIN or BEG on the screen to indicate BEGIN mode.

However, it you do set it to BEGIN mode, make sure you reset your calculator to END mode. It would be a disaster to go to the first exam and forget that your calculator is set on BEGIN mode.

REPLY
Problem Set 2 number 2

2. An investor can buy a tract of farmland today that he believes will sell for $50,000.00 in eight
years. His required rate of return for this type of investment is 12% per annum compounded
monthly. How much should he pay for the land today? (assume that there are no taxes or other
periodic costs involved)

N=96 (8 x 12)
I%=12/12
PV=? solving for
PMT=0 or empty
FV=50,000

To solve this problem we simply need to divide the interest rate by the compounding periods per year. If N (the number of periods) is in months then I% needs to be in the same units (months in this case). N and I% always have to match up. If N is in years, then I% is in years. If N is in months, I% has to be in months.

The above assumes that your calculator is set to 1 payment per year. If you set you calculator to 12 payments per year, then the calculator will divided what ever you enter into I% (12 in this case) by 12. That is the only thing that the payment per year function does. It just divides I%.

BEGIN MODE VS END MODE
You do want to make sure that your calculator is on END mode normally. By far, most problems will indicate that cash flows occur at the end of the period. You need to figure out how to set your calculator to END mode because each calculator is different. When you take the calculator out of the box, I am 99.9% sure that is set to END mode by default. Some calculators might even display 'END' on the screen.

Occasionally, we might need to change our calculators to BEGIN mode when cash flows occur at the beginning of a period. Again, you need to refer to your calculator manual to set it to BEGIN mode. Some calculators display a BEGIN or BEG on the screen to indicate BEGIN mode.

However, if you do set it to BEGIN mode, make sure you reset your calculator to END mode. It would be a disaster to go to the first exam and forget that your calculator is set on BEGIN mode.

It is good that you are working these things out now (before Saturday!).