Financial Mathematics
Skill Checklist
Track your progress across all skills in your objective. Mark your confidence level and identify areas to focus on.
Track your progress:
Don't know
Working on it
Confident
📖 = included in formula booklet • 🚫 = not in formula booklet
Track your progress:
Don't know
Working on it
Confident
📖 = included in formula booklet • 🚫 = not in formula booklet
Compounding (Appreciation & Depreciation)
Depreciation
where FV is the future value, PV is the present value, n is the number of years, and r% is the annual depreciation rate of the item.
Compound Interest Formula
where FV is the future value, PV is the present value, n is the number of years, k is the number of compounding periods per year, and r% is the nominal annual rate of interest.
Using TVM Solver (Calculator) - Compound Interest
You should understand the meaning of each variable and know how to use your calculator's Finance/TVM Solver:
To solve for an unknown, move your calculator's cursor to the unfilled slot and press alpha → enter.
Be very careful if P/Y is different from C/Y. The letter N will always be the number of payment periods, or in other words the number of years times P/Y.
Positive & Negative Cash Flows (TVM)
Whenever you use the Finance App (TVM Solver) on your calculator, it's critical that you enter and interpret the signs correctly:
When you receive money from a bank or savings account, that value is positive, because you're gaining money.
When you send money to a bank, that value is negative, because you're losing money.
Inflation & Real Value
The real interest rate (needed when a question involves inflation) is given by r%=c%−i%, where c% represents the given interest rate (the nominal rate) and i% represents the inflation rate.
Note: You can calculate the real interest rate r% and enter it directly into the TVM solver (when required) as the nominal annual interest rate (I% on your calculator), since the TVM solver does not account for inflation effects in its standard calculations.
Loans
Positive & Negative Cash Flows (TVM)
Whenever you use the Finance App (TVM Solver) on your calculator, it's critical that you enter and interpret the signs correctly:
When you receive money from a bank or savings account, that value is positive, because you're gaining money.
When you send money to a bank, that value is negative, because you're losing money.
Using TVM Solver (Calculator) - Loans
In IB, loans are paid off at the end of a number of periods (N) and have an annual interest rate (I%), an initial balance (PV), a fixed payment (PMT), and an outstanding balance (FV). Payments per year and compounds per year typically occur at the same frequency (P/Y, C/Y).
You can use the TVM solver with loans to find any of those variables if you know all the others.
Annuities
Using TVM Solver (Calculator) - Annuities
You should be able to use the TVM Solver on your calculator to perform calculations with annuities.
In IB, annuities are paid at the end of a number of periods (N) and have an annual interest rate (I%), an initial lump-sum deposit (PV), a fixed payment (PMT) and a future value (FV), which represents the total accumulated amount at the end of the term.
In the special case of annuities, payments and compounding occur can occur at different same frequencies (P/Y & C/Y).
Positive & Negative Cash Flows (TVM)
Whenever you use the Finance App (TVM Solver) on your calculator, it's critical that you enter and interpret the signs correctly:
When you receive money from a bank or savings account, that value is positive, because you're gaining money.
When you send money to a bank, that value is negative, because you're losing money.