4.6 Calculating the Term
LEARNING OBJECTIVES
- Calculate the number of compounding periods.
- Calculate the term of a loan or investment.
How long will it take to reach a financial goal? At a casual get-together at your house, a close friend discusses saving for a 14-day vacation to the Blue Bay Grand Esmeralda Resort in the Mayan Riviera of Mexico upon graduation. The estimated cost from Travelocity.ca is $1,998.94 including fares and taxes. He has already saved $1,775 into a fund earning 8% compounded quarterly. Assuming the costs remain the same and he makes no further contributions, can you tell him how soon he will be basking in the sun on the beaches of Mexico?
Using a Financial Calculator
Although it is possible to find the number of compounding periods by using the future value or present value formulas, it is much more practical to use a financial calculator. You use the financial calculator in the same way as described previously, but the only difference is that the unknown quantity is N (the number of compoundings). You must still load the other six variables into the calculator and apply the cash flow sign conventions carefully.
USING THE TI BAII PLUS CALCULATOR TO FIND THE NUMBER OF COMPOUNDINGS FOR COMPOUND INTEREST
Enter values for the known variables (PV, FV, I/Y, PMT, P/Y and C/Y) following the steps below and paying close attention to the cash flow sign convention for PV and FV.
- For the main button keys in the TVM row (i.e. N, I/Y, PV, PMT, FV), enter the number first and then press the corresponding button.
- For example, to enter N=34, enter 34 on the calculator and then press N.
- For P/Y and C/Y, press 2nd I/Y. At the P/Y screen, enter the value for P/Y and then press ENTER. Press the down arrow to access the C/Y screen. At the C/Y screen, enter the value for C/Y and then press ENTER. Press 2nd QUIT (the CPT button) to exit the menu.
- For example, to enter P/Y=4 and C/Y=4, press 2nd I/Y. At the P/Y screen, enter 4 and press ENTER. Press the down arrow. At the C/Y screen, enter 4 and press ENTER. Press 2nd QUIT to exit.
After all of the known quantities are loaded into the calculator, press CPT and then N to solve for the number of compounding periods.
NOTE
When entering both PV and FV into the calculator, ensure proper application of cash flow sign convention to PV and FV. One number must be negative and the other must be positive. An ERROR message will appear on the calculator display if PV and FV are entered with the same signs (i.e. both are negative or both are positive).
EXAMPLE
Jenning Holdings invested $43,000 at 6.65% compounded quarterly. A report from the finance department shows the investment is currently valued at $67,113.46. How long has the money been invested?
Solution:
Step 1: Calculate the value of N.
| N | ? |
| PV | [latex]-43,000[/latex] |
| FV | [latex]67,113.46[/latex] |
| PMT | [latex]0[/latex] |
| I/Y | [latex]6.65[/latex] |
| P/Y | [latex]4[/latex] |
| C/Y | [latex]4[/latex] |
[latex]\displaystyle{N=26.9999....}[/latex]
Step 2: Convert N to years and months.
[latex]\begin{eqnarray*} \mbox{Number of Years} & = & \frac{N}{C/Y} \\ & = & \frac{26.999...}{4} \\ & = & 6.74999... \\ & \rightarrow & 6 \mbox{ years} \\ \\ \mbox{Number of Months} & = & 0.74999... \times 12 \\ & = & 8.999... \\ & \rightarrow & 9 \mbox{ months} \end{eqnarray*}[/latex]
Jenning Holdings has had the money invested for six years and nine months.
EXAMPLE
Tabitha estimates that she will need at least $20,000 for her daughter’s postsecondary education when she turns 18. If Tabitha is able to save up $8,500, how far in advance of her daughter’s 18th birthday would she need to invest the money at 7.75% compounded semi-annually? Answer in years and months.
Solution:
The timeline for the investment is shown below.
Step 1: Calculate the value of N.
| N | ? |
| PV | [latex]-8,500[/latex] |
| FV | [latex]20,000[/latex] |
| PMT | [latex]0[/latex] |
| I/Y | [latex]7.75[/latex] |
| P/Y | [latex]2[/latex] |
| C/Y | [latex]2[/latex] |
[latex]\displaystyle{N=22.50682....}[/latex]
Step 2: Convert N to years and months.
[latex]\begin{eqnarray*} \mbox{Number of Years} & = & \frac{N}{C/Y} \\ & = & \frac{22.50682...}{2} \\ & = & 11.2534... \\ & \rightarrow & 11 \mbox{ years} \\ \\ \mbox{Number of Months} & = & 0.2534... \times 12 \\ & = & 3.0409... \\ & \rightarrow & 4 \mbox{ months} \end{eqnarray*}[/latex]
If Tabitha invests the $8,500 11 years and 4 months before her daughter’s 18th birthday, it will grow to $20,000.
TRY IT
Click to see Solution
| N | ? |
| PV | [latex]-15,500[/latex] |
| FV | [latex]24,980[/latex] |
| PMT | [latex]0[/latex] |
| I/Y | [latex]6.92[/latex] |
| P/Y | [latex]12[/latex] |
| C/Y | [latex]12[/latex] |
[latex]\displaystyle{N=82.9959....}[/latex]
[latex]\begin{eqnarray*} \mbox{Number of Years} & = & \frac{N}{C/Y} \\ & = & \frac{82.9959...}{12} \\ & = & 6.91633... \\ & \rightarrow & 6 \mbox{ years} \\ \\ \mbox{Number of Months} & = & 0.9163... \times 12 \\ & = & 10.995... \\ & \rightarrow & 11 \mbox{ months} \end{eqnarray*}[/latex]
The money has been invested for 6 years and 11 months.
Exercises
- How long will it take an investment of $68,000 to mature to at least $89,032 if the interest rate is 4.91% compounded monthly?
Click to see Answer
5 years, 6 months
- What is the term of an investment of $41,790 that has a maturity value of $120,000 at 8.36% compounded quarterly?
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12 years, 9 months
- How long did it take a $111,244 investment to earn $888,756 in interest if the interest rate is 8.8% compounded semi-annually?
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25 years, 6 months
- A debt of $7,500 is owed. Suppose prevailing interest rates are 4.9% compounded quarterly. How far in advance was the debt paid if the creditor accepted a payment of $6,721.25?
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2 years, 4 months
- Wayne was late in making a $3,500 payment to Dora. If Dora accepted a payment of $3,801 and charged 5.59% compounded semi-annually, how late was the payment?
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1 year, 6 months
- How long will it take $5,800 to become $10,000 at 6.25% compounded quarterly?
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8 years, 10 months
- A friend of yours just won the 6/7 category on the Lotto Max (matching six out of seven numbers), and her share of the prize was $275,000. She wants to pay cash for a new home that sells for $360,000. If she can invest the money at 7.45% compounded semi-annually, how long will she have to wait to purchase the home assuming its sale price remains the same?
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3 years, 9 months
- Lakewood Properties anticipates that the City of Edmonton in the future will release some land for a development that costs $30 million. If Lakewood can invest $17.5 million today at 9.5% compounded monthly, how long will it take before it will have enough money to purchase the land?
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5 years, 9 months
- As marketing manager, you want to pursue a new product development for which you require $1 million for research. However, budgetary constraints mean you can only receive $850,000. If you take your budget and invest it at 8.7% compounded monthly, how long will it be before you can pursue the necessary research for the project?
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1 year, 11 months
- How long will it take money to triple if it earns 8.2% compounded quarterly?
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13 years, 7 months
Attribution
“9.7: Determining the Number of Compounds” from Business Math: A Step-by-Step Handbook Abridged by Sanja Krajisnik; Carol Leppinen; and Jelena Loncar-Vines is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
“9.7: Determining the Number of Compounds” from Business Math: A Step-by-Step Handbook (2021B) by J. Olivier and Lyryx Learning Inc. through a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License unless otherwise noted.
