Sunday, January 24, 2021

HP 12C: Solving Two Actuarial Problems

 HP 12C: Solving Two Actuarial Problems


Solve for Interest and Number of Periods Given Present Value Annuity Factor and Future Value Annuity Factor


Given the following:


* Present Value Annuity Factor (PVAF)

* Future Value Annuity Factor (FVAF)


Solve for both:


*  the interest rate

*  the number of periods of the annuity


Keep in mind that present value and future value annuity factors are not the same of present value and future value, respectively.


Recall that:


PVAF = (1 - (1 + i)^-n) / i


FVAF = ((1 + i)^n - 1) / i


Note that:

FVAF = ( (1 + i)^n - 1 ) / i

FVAF = (1 + i)^n * (1 - (1+i)^-n) / i

FVAF= (1 + i)^n * PVAF


Then:

FVAF / PVAF = (1 + i)^n

ln (FVAF / PVAF) = ln (1 + i)^n

ln (FVAF / PVAF) = n * ln(1 + i)

ln (FVAF / PVAF) / ln(1 + i) = n



Also:

1 / FVAF + i 

= i / ((1 + i)^n - 1) + i

= i / ((1 + i)^n - 1) + (i * (1 + i)^n - 1)) / ((1+ i)^n - 1)

= (i + i * (1 + i)^n - i) / ((1 + i)^n - 1)

= (i * (1+i)^n) / ((1 + i)^n - 1)

= (1 + i)^n / (1 + i)^n * ( i / (1 - (1 + i)^-n)

= 1 * ( i / (1 - (1 + i)^-n)

= 1 / PVAF


Then:

1 / FVAF + i = 1 / PVAF

i = 1 / PVAF - 1 / FAVF


To summarize: 

i = 1 / PVAF - 1 / FAVF

n = ln (FVAF / PVAF) / ln(1 + i)


The following program solves for interest and number of payments. 


HP 12C (Classic) Program


Stack set up:

Y: PVAF

X:  FVAF


Step: Key: Code

01:  STO 1 :  44, 1

02:  x<>y :  34

03:  STO 2 :   44, 2

04:  1/x :   22

05:  x<>y :   34

06:  1/x :   22

07:  - :   30

08:  STO 3 :  44, 3

09:  ENTER :  36

10:  ENTER :  36

11:  1 :   1

12:  + :   40

13:   LN : 43, 23

14:  RCL 1 : 45, 1

15:  RCL 2 : 45, 2

16:  ÷  :  10

17:  LN :  43, 23

18:  x<>y : 34

19:  ÷  : 10

20:  STO 4 :  44, 4

21:  GTO 00 :  43, 33, 00


Example:


Input:

Y:  PVAF = 22.3965

X:  FVAF = 40.5681


Results:

Y:  i = 0.02   (2%)

X:  n = 30  (30 periods)


Present Value of an Annuity Due with an Effective Discount Rate


The problem determines the present value of an annuity due with an effective discount rate.  The effective discount rate is different from the interest rate (i).  Convert the effective discount rate to interest rate by:


i = d / (1 - d)   [i, d are in decimal form]



HP 12C (Classic) Program


Stack set up:

Clear TVM values

Store n:  [ n ]

Store payment: [ PMT ]

X:  discount rate (as a percentage.  Example: for 10%, enter 10)


Step: Key: Code

01:  BEG  : 43, 7

02:  ENTER  : 36

03:  CLx  :  35

04:  R↓   :  33

05:  1   :  1

06:  %  :  25

07:  1   :  1

08:  x<>y   :  34

09:  -  :  30

10:  LSTx  : 43, 36

11:  x<>y   :  34

12:  ÷  : 10

13:  1  :  1

14:  EEX  : 26

15:  2  :  2

16:  ×  :  20

17:  [ i ] :  12

18:  [ PV ]  :  13

19:  GTO 00  :  43,33,00


Example:


Input:

n = 36, PMT = -250.00

X:  d = 5%;  (5  [R/S])


Results:

X:  4211.10


Present Value:  $4,211.10


Source:


Finan, Marcel B.  A Basic Course in the Theory of Interest and Derivatives Markets:  A Preparation for the Actuarial Exam FM/2   Arkansas Tech University, 2017.  


Eddie


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