Beingassociatedwithbankforshort-term,Ioftengetthisquestionfromfriendsandrelatives.

How
tocalculateEMI?Whenyouapplyforloan,theywilljusttellyoutheEMI,butdoesnottellyouhow
theyarecalculatedunlessyouaskthemspecificallytoshowhowtheycalculatedit.EMItableis
alsocalledasamortizationtable,whichshowsthebalanceateachinstallment.
EMIorequatedmonthlyinstallmentsisthemostpopularformofloanpayment.Itisafixedamount
ofrepaymentmadeeverymonthtowardstheloan,whichincludespaymenttowardsbothprincipal
andinterest.
ItiseasytoprepareanEMItableinExcelsheet.ThereisafinancialfunctioncalledPMTtocalculatetheEMI.
PMT(rate,nper,pv)
rateInterestratefortheloan.
nperTotalnumberofpaymentsfortheloan.
pvPresentvalue/principal.
PrepareexcelsheetwiththefollowingdataandenterthePMTfunctioninthecellC7.

Rate=C6/C5,whichdividesrateofinterestbynumberofmonthsthusgivingrateofinterestper
month.
Nper=C4*C5,whichgivestotalnumberofmonthsweneedtopayequatedinstallment.
Donotforgettotaketheloanamountinminusvalue,sothatourEMItableshowspositivevalues.
NowpreparetablewithSerialNumberofPayment,MonthlyInstallment,InterestAmount,PrincipalAmount,
andBalance.Takethefirstrowwithserialnumber0andinthebalanceamountpointthecelltoLoan
Amounttype=C3NextEntertheserialnumberas1.Monthlyinstallmentswillremainsameso
takeabsolutecellreference(byadding$)whichwillnotchangewhenyoudragthecellstoautoincrement.
InMonthlyInstallmentcolumn,enter=$C$7.IntheInterestAmountcolumn,enter
=F10*$C$6/$C$5whichmeanswearedividingthebalanceamountattheendofthemonthbymonthly
interestrate(rateofinterest/paymentsperyear).Astherateofinterestandyearlypaymentsarenotgoing
tochange,weusedabsolutereferenceusing$sign.InPrincipalAmountcolumntype=C11-D11which
deductsthemonthlyinterestfrommonthlyEMIandwhateverthebalanceavailableshowsaspayment
towardstheprincipalamount.InBalancecolumnenter,=F10-E11,whichmeanswearedeductingthe
principalamountintheEMItoascertaintheoriginalbalanceattheendofthemonthuponwhichweare
goingtocalculateinterestforthenextmonth.Nowselecttherowanddragituntilbalancebecomes0.
Thatsall!WemadeourownEMIcalculatorinExcel.ThisExcelEMIcalculatoriscreatedfora
tenureof20years.Ifyouarejustcalculatingfor5years,i.e.,60months,61stmonthshowsvalues
redcoloredandinminusrange.Soyouneedtotakeupto0inthebalancecolumn.Ignorethe
valuesinRED.Ifyouwanttocalculateformoreyears,thenjustselectthelastrowanddragitto
extendit.
DownloadtheSimpleExcelEMICalculator.
DownloadtheExcelEMICalculatorwithAdHocPayments.
DownloadtheExcelEMICalculatorwithMultipleReimbursements.
DownloadtheExcelEMICalculatorwithAlltheThreeSheets.
Update Oct 16, 2009:Mr.Parixit Namdhar,oneofmyblogreaders,suggestedthatinsteadof
enteringtheformula=$C$7incolumnCentering=IF($B11>($C$4*$C$5),0,$C$7)solvesthe
minusvaluesproblem.Thisformulamakestheminusvalueszeromakingiteasilyunderstandable
andlooksneat.ThanksalotParixit!
Update April 22, 2012:Mr.Ravi Krishna,oneofmyblogreaders,updatedtheExcelsheetwith
adhocpaymentsandmultiplereimbursements,whichalotofreaderswereasking.Thankyouvery
muchKrishna!

RECURRING DEPOSIT

Paymentperyear
Noofdepositsmade
Amountdepositedeverymonth
Presentvalue

NominalRate
Compoundingperiodperyear(npery)
EffectiveAnnualisedRate
Rateformonthlycompounding

=FV(Rate,Nper,Pmt,Pv,Type)[FVstandsforFutureValue]
where
Rate=ModifiedRateofinterest(Iwillcometo"modified"later)
Nper=No.ofdepositstobemade(i.e.36inthisexample)
Pmt=Amountdepositedeverymonth(i.e.Rs.500inthisexample)
Pv=Putthisas0(PVstandsforPresentValuewhichisZero)
Type=Putthisas1asthedepositismadeatthebeginningofthemonth

=FV(8.687%/12,36,500,0,1)[Note:Rateisdividedby12aswearemakingmonthlydeposits]
=Rs.20,627.38

The5 TVMfunctions (RATE, NPER, PMT, FV, and PV) in spreadsheet programs (Excel, OpenOffice Calc,
LibreOffice Calc, Symphony Calc, GNumeric) and in financial calculators (TI BA II plus, HP 10bII plus, Casio Fc
100) are programmed using one of the following two time value of money equations.

PV (1+RATE)^NPER + PMT * (1+RATE * type) [ { (1+RATE)^NPER } - 1 ] / RATE + FV = 0

OR

FV (1+RATE)^-NPER + PMT * (1+RATE * type) [ 1 - { (1+RATE)^-NPER } ] / RATE + PV = 0

The first one of these two equations is defined as sum of compounded initial investment, compounded
periodic payment and the non-compounded terminal value.

The second one of these two equations is defined as sum of discounted terminal investment, discounted
periodic payment and the non-discounted initial investment.

We can define the five functions from these two equations to solve for the 5 different TVM variables

f(RATE)
f(NPER)
f(PMT)
f(PV)
f(FV)

All these functions can be solved for to find NPER, PMT, PV and FVyet we are unable to solve for f(RATE).
As it is evident from the two equations that variable for RATE is not separable from the other four variables
in the time value of money equations.

This leads us to make use of iterative methods in locating the interest rate at which the functionf(RATE)
yields a value of ZERO. Discussing iterative methods here is beyond the scope of this discussion and one can
find many examples on the web for various numerical methods one can adapt in finding the RATE.
Now as we are setting the sum to zero in each of the two TVM equations, this requires that at least one of
the three values for PMT, PV or FV must be negative and at least one of these three value must be positive.
Without this enforcement the 2 two time value of money equations will not yield the desired results for the
PMT, PV and FV.

Thus we are asked to make use of conventions from accounting when it comes to financial transactions that
any money amount beingpaid out(DEBIT) should be used with anegation. And any money amount
beingpaid in(CREDIT) should be used aspositive.

So if you have an initial investment where you invested $100,000 that means an outgoing cash flow for PV
should therefore be -100000 and at the maturity date the incoming amount for FV will be positive.

But then those who program these spreadsheet programs (Excel, OO Calc, LO Calc, Symphony Calc, and
Gnumeric), and the financial calculators (TI BA II plus, HP 10bII plus, Casio Fc 100) simply take other peoples
ideas without much thought as to what is it they are programming or what else lies beyond the trivial TVM
equations. Not many people tend to think on their own as someone in a New York newspaper once wrote
"Thinking is difficult" and we tend to not bother putting pressure on own nerves.

What I am getting at is that time value of money is much more complex than the obvious that has been
programmed into spreadsheet functions and pocket calculators. For examples, annuity payments (PMT) may
not be in constant amount and it may grow or shrink by a rate or it may increase or decrease by a constant
amount. To make thing a bit more interesting, the annuity payments may never end and go on forever
*young*. But then growth may not coincide with periodic payment and there are gaps between payments and
growth. Or the payments may not commence at all at present and are deferred into the future.

So you can either accept what is spoon fed to you or you can leave the nest at age 18 and start to think on
your own. I have done the latter yet no one bother to offer me a job since 1993 as I am a college drop out
thanks largely to those who run the State of New York (Vampire Statesmen they are called)