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Lecture 9 Financial Functions

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0% found this document useful (0 votes)
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Lecture 9 Financial Functions

Uploaded by

AFRO TV
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Microsoft Excel Financial Functions

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

CS&E 1111 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 1111 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
Total Interest
$82.00

$81.00

$80.00

$79.00
Simple Interest Compound Interest
SimpleInterest CompoundInterest

CS&E 1111 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 1111 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 1111 ExFin


The Basics
 PV: present value, what you
get/pay at the beginning of the
financial transaction
 FV: future value, what you are
going to get OR what you will have
to pay at the end of the financial
transaction
 PMT: payment made each period. It
remains constant over life of
annuity
 RATE: interest rate per period
 NPER: number of payment periods
CS&E 1111 ExFin
$100 Loan for 2 Years Compounded
Quarterly at 8% per year
Beginning End
PV $100 T T T T T T T
FV $0
T
PM PM PM PM PM PM PM PM

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 1111 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 $0
? 5000

3% RATE per period

CS&E 1111 ExFin


When using Financial Functions remember to..
 Use consistent units of time
 RATE per quarter, NPER number of quarters and
PMT payment per quarter.
 Use consistent signs
 outgoing cash: (- ), incoming cash: (+ )
 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 1111 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 $50 $50
?
$5000
.025% RATE per period for 24 periods

CS&E 1111 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
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)


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

Will your payment be a positive or negative value?


CS&E 1111 ExFin
Rate( ): Returns Rate per Period
What is the annual rate $18,999 for
of interest of this loan – a new Chevy Cruze
assuming it is $2000 down and
$350/month
compounded monthly. For 5 years

=RATE(<nper>, <pmt>, <pv>, <fv>, <type>)

=RATE(5*12, -350, 18999-2000) * 12 months per yr


Remember to get the correct compounding - calculate rate per
period (month)  then convert it to rate per year.

CS&E 1111 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 per yr

Remember to get the correct compounding - calculate the


number of periods (quarterly) and then convert to years.

CS&E 1111 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 1111 ExFin


The “type” argument:
I have been putting $100 per
A B
quarter in the bank for the past 1 Value in 10 Years
10 years in an effort to save Payment at Payment at
money for my child’s college Beginning of End of the
education. How much money is 2 the Month Month
currently in this account 3 $4,679.48 $4,644.65

assuming the bank has paid a


3% annual interest rate
compounded quarterly?
Make Payments at the Make Payments at the End
Beginning of Each Quarter: of Each Quarter:
=FV(.03/4, 4*10, -100,0,1) =FV(.03/4, 4*10, -100,0,0)

CS&E 1111 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 B C D
1 Interest Rate 4%
2
Balloon Monthly
3 Loan Amount # Years Payment Payment
4 100000 30 0 ($477.42)
5 100000 30 10000 ($463.01)
6 100000 15 0 ($739.69)
7 100000 15 10000 ($699.05)

CS&E 1111 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 1111 ExFin

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