Microsoft Excel Financial Functions

Objectives:
Understanding and using Financial Functions the time value of money PV, FV, Rate, NPER, PMT problem solving

CS&E 101 ExFin

Simple Interest vs. Compound Interest

Simple interest always calculates interest based on the original amount. So $1000 at 4% per year for 2 years Year 1: $1000 * 4% $40 in interest for the first year. Year 2: $1000 * 4% $40 in interest for the second year. So after 2 years you would have $1000 * 4% *2 $80 interest For a total of $1080
CS&E 101 ExFin

Simple Interest vs. Compound Interest

Compound interest - always calculate interest based on latest amount Year 1: $1000 at 4%/yr for 1 year is $40 Year 2: $1040* 4% =$41.60 so now after 2 years you have $1081.60
T ot al I nt er est

$82.00 $81.00 $80.00 $79.00 Simple Int erest

Si mpl e I nt er est

Compound Int erest

Compound I nt er est

CS&E 101 ExFin

Compounding Interest Quarterly

What if we compound our interest quarterly instead of yearly? $1000 at 4% per year compounded quarterly for one year is actually 4 separate calculations Each quarter updating the principa1 and using the rate 1% per quarter. Principal Interest 1st quarter $1000.00*1% = $10.00 2nd quarter $1010.00*1% = $10.10 3rd quarter $1020.10*1% = $10.201 4th quarter $1030.301*1% $10.30
Total interest for year 1 $40.60 vs. $40 for simple interest
CS&E 101 ExFin

Financial Functions

Functions that can be used to calculate values based on compounded interest - Taking a loan
- Investing in a savings account

The basic financial functions use these 5 basic variables : PV, FV, RATE, PMT, NPER Other functions are also available: NPV, PPMT, IPMT

CS&E 101 ExFin

The Basics

PV: present value, what you get/pay at

get OR what you will have to pay at the end of the financial transaction

the beginning of the financial transaction

FV: future value, what you are going to PMT: payment made each period. It
remains constant over life of annuity

RATE: interest rate per period NPER: number of payment periods

CS&E 101 ExFin

$100 Loan for 2 Years Compounded Quarterly at 8% per year

Beginning PV $100 End FV $0

2% RATE for each of 8 Quarters $13.65 PMT for each of 8 Quarters Interest RATE per compounding period (8% per yr/4 qtr per year) for NPER periods (2yrs * 4 Qtr/yr) with Payments PMT($13.65) - In/Out at Equal Intervals

CS&E 101 ExFin

PV ( ): Present Value - What I have at the beginning How much money would I have to set aside now to have a $5000 down payment on a car when I graduate in 2 years? I plan to put the money in a CD that pays 3% annual interest compounded yearly.

=PV(<rate>, <nper>, <pmt>, <fv>, <type>)

RATE = 3% (per year) interest per period NPER = 2 (years) number of periods PMT = 0 (per year) payment per period FV = $5000 - amount at the end of the transaction

=PV(0.03, 2, 0,5000)
?
$0 3% RATE per period
CS&E 101 ExFin

$0

5000

When using Financial Functions remember to..

Use consistent units of time

RATE per quarter, NPER number of quarters and PMT payment per quarter.
outgoing cash: (- ), incoming cash: (+ )

Use consistent signs

For arguments that are zero at least a comma must be put into the function to maintain the argument order, unless no other non-zero arguments follow then it many be deleted.
=PV(0.03, 2, 0, 5000,0) same as =PV(0.03, 2, , 5000)

CS&E 101 ExFin

FV ( ): Future Value - What I have at the end

I plan on depositing $5000 into a CD that pays 3% annual interest compounded monthly. I plan to add an additional $50 each month. How much will I have at the end of 2 years?

=FV(<rate>, <nper>, <pmt>, <pv>, <type>)

RATE = 3%/12 .025% (per month) interest per period NPER = 2 * 12 (months) number of periods PMT = -50 (per month) payment per period PV = -$5000 - amount at the beginning of the transaction

=FV(0.03/12, 2*12, -50 , -5000)

$50 $5000 $50 $50
?

.025% RATE per period for 24 periods

CS&E 101 ExFin

PMT( ): Returns the periodic payment

I have been offered a 5 year car loan of $15,000 at 9% annual interest rate compounded monthly. What is the monthly payment is needed to completely pay off the loan at the end of the 5 years?

=PMT(<rate>, <nper>, <pv>, <fv>, <type>)

=PMT(B3/B5, B4*B5, B1, B2)

:
1 2 3 4 5 6 A B Original Loan Value $ 15,000 Ending Loan Value $ Yearly Interest Rate 9% Number of Years 5 Compounding Periods per Year 12 Monthly Payment ($311.38)

Will your payment be a positive or negative value?

CS&E 101 ExFin

Rate( ): Returns Rate per Period

What is the annual rate of interest of this loan assuming it is compounded monthly.
$18,999 for a new Chevy XP $2000 down and $350/month For 5 years

=RATE(<nper>, <pmt>, <pv>, <fv>, <type>) =RATE(5*12, -350, 18999-2000) * 12 months/yr

Remember to get the correct compounding - calculate rate per period (month) then convert it to rate per year.
CS&E 101 ExFin

NPER( ) : # Payment Periods

Write an Excel formula to determine how many years will it take to save $12,000 if I put $10,000 into a savings account paying 4% annual interest compounded quarterly. =NPER(<rate>, <pmt>, <pv>, <fv>, <type>) =NPER(4%/4, , -10000, 12000) /4 quarters/yr
Remember to get the correct compounding - calculate the number of periods (quarterly) and then convert to years.

CS&E 101 ExFin

The type argument: Type If payments are made:

0 (default) At the end of the period 1 At the beginning of the period
Example: Type 0: You make a car payment to the bank at the end of each month to pay down the principal Type 1: An annuity pays you a set amount each month at the beginning of the month
Unless specifically mentioned assume type 0
CS&E 101 ExFin

The type argument:

I have been putting $100 per quarter in the bank for the past 10 years in an effort to save money for my childs college education. How much money is currently in this account assuming the bank has paid a 3% annual interest rate compounded quarterly? Make Payments at the Beginning of Each Quarter:
1 A B Value in 10 Years Payment at Payment at Beginning of End of the Month 2 the Month 3 $4,679.48 $4,644.65

Make Payments at the End of Each Quarter:

=FV(.03/4, 4*10, -100,0,1)

=FV(.03/4, 4*10, -100,0,0)

CS&E 101 ExFin

Another problem
Write an Excel formula in cell D4 that can be copied down the column to calculate the monthly payment for each of the mortgages listed. The annual interest rate is 4% compounded monthly. Note: A balloon payment is an amount due at the end of the loan. =PMT(<rate>, <nper>, <pv>, <fv>, <type>)

=PMT(B$1/12, B4*12, A4, -C4)

A 1 Interest Rate 2 B 4% Balloon Monthly Payment Payment 0 ($477.42) 10000 ($463.01) 0 ($739.69) 10000 ($699.05) C D

3 Loan Amount # Years 4 100000 30 5 100000 30 6 100000 15 7 100000 15

CS&E 101 ExFin

A Summary of Financial Functions

Financial Function can be used to calculate financial transactions with compound interest. PV, FV, PMT, NPER, RATE are all dependent on the values of the other four Use positive values for cash flow back to you, and negative values for cash flow from you to a financial institution.. Use correct compounding periods for your values of NPER, PMT and RATE. Use the correct type argument
CS&E 101 ExFin