Excel Financial Functions
• Agenda
– Discuss interest and the time value of money
– Explore the Excel time value of money functions
Working with Financial Functions
• Cost of a loan to the borrower is largely based
on three factors:
– Principal: amount of money being loaned
– Interest: amount added to the principal by the lender
• Calculated as simple interest or as compound interest
– Time required to pay back the loan
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Using Functions to Manage Personal
Finances
Function
Use to determine…
FV (future value)
How much an investment will be worth after a series of monthly payments at
some future time
PMT (payment)
How much you have to spend each month to repay a loan or mortgage within a
set period of time
PV (present value)
Largest loan or mortgage you can afford given a set monthly payment
NPER (number of periods)
How long it will take to pay off a loan with constant monthly payments
RATE
Determines the PERIODIC interest rate
CUMIPMT
The cumulative interest paid between two periods
CUMPRINC
The cumulative principal paid between two periods
IPMT (interest payment)
How much of your monthly loan payment is used to pay the interest
PPMT (principal payment)
How much of your monthly loan payment is used for repaying the principal
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Excel Functions are
Excel Functions
To use them, you must
understand the
TIME VALUE OF MONEY
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Understanding time value of money
• Money will increase in value over time if the money is
invested and can make more money.
• If you have $1,000 today, it will be worth more
tomorrow if you invest that $1,000 and it earns
additional money (interest or some other return on
that investment).
• If you have $1,000 today, it will NOT be worth more
tomorrow if you put it in an envelope and hide it in a
drawer. Then the time value of money does not apply
as an increase. It will most likely decrease in value
because of inflation. Of course, you won’t lose the
whole $1,000 either…
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Introduction to Interest Calculations
• When you borrow money you pay interest
• When you loan money, you receive interest
• When you make a payment
– part of the payment is applied to interest
– Part of the payment is applied to principal
Types of Interest
• Simple interest
– Interest is paid only on the principal
– Many certificates of deposit work this way
• Compound interest
– Interest is added to the principal each period
– Interest is calculated on the principal plus any accrued interest
– Compounding can occur on different periods
• Annually, quarterly, monthly, daily
Difference between simple and
compound interest
• Assume that you have $1,000 to invest.
$1,000 is the present value (PV) of your
money.
• You can invest it and receive “simple” interest
or you can earn “compound” interest.
• The money that you have at the end of the
time you have invested it is called the “future
value” (FV) of your money.
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Future value of money
• Simple interest is always calculated on the initial
$1,000. 5% interest on $1,000 is $50. Always
$50.
• When interest is paid on not only the principal
amount invested, but also on any previous
interest earned, this is called compound interest.
FV = Principal + (Principal x Interest)
= 1000 + (1000 x .05)
= 1000 (1 + i)
= PV (1 + i)
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Simple vs. compound interest
comparison
Year
Simple Interest
Compound Interest
0
$1,000
$1,000
1
$1,050
$1,050
2
$1,100
$1,102.50
3
$1,150
$1,157.62
4
$1,200
$1,215.61
5
$1,250
$1,276.28
10
$1,500
$1,628.89
20
$2,000
$2,653.30
30
$2,500
$4,321.94
$1,000 Invested at 5% return
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Time Value of Money Functions
• We are just solving the same equation for a
different variable
– RATE determines the interest rate
– NPER determines the number of periods
– PMT determines the payment
– PV determines the present value of a transaction
– FV determines the future value of a transaction
Future Value Function
FV(rate, nper, pmt, [pv], [type])
Argument
Description
rate
Interest rate per compounding period
nper
Number of compounding periods
Pmt
Payment made each compounding period
Pv
Present value of current amount
type
Designates when payments or deposits are
made
Type 0 – end of period. Default.
Type 1 – beginning of period
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Present Value Function
PV(rate, nper, pmt, [fv], [type])
Argument
Description
rate
Interest rate per compounding period
Nper
Number of compounding periods
pmt
Payment made each period
fv
Future value of the amount received today
type
Designates when payments are made
Type 0 – end of period. Default.
Type 1 – beginning of period
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Payment function
PMT(rate, nper, pv, [fv], [type])
Argument
Description
rate
Interest rate per compounding period
nper
Number of compounding periods
pv
Present value
fv
Future value, residual left over after the loan is
completed. Could be a balloon payment. Can
be omitted if = 0.
type
Designates when payments are made
Type 0 – end of period. Default.
Type 1 – beginning of period
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The RATE Function
• Determines the interest rate PER PERIOD
based on
– The number of periods
– The payment
– The present value
– The future value
– The type
The NPER Function
• Determines the number of periods based on
– The interest rate
– The payment
– The present value
– The future value
– The type
What about if you borrow money?
• If you borrow money, the lender wants to earn
“compound” money on his/her/its
investment.
• If you borrow $1000 at 10%, then you won’t
pay back just $1,100 (unless you pay it back at
once during the initial time period).
• You will pay it back “compounded”. Interest
will be calculated each period on your
remaining balance.
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Amortization table $1,000 loan, pay $100 year, 5% year interest
Year
Amount Owed
Amount Plus Interest
Payment
1
$1,000.00
$1,050.00
$100.00
2
$950.00
$997.50
$100.00
3
$897.50
$942.38
$100.00
4
$842.38
$884.49
$100.00
5
6
7
8
9
$784.49
$723.72
$659.90
$592.90
$522.54
$823.72
$759.90
$692.90
$622.54
$548.67
$100.00
$100.00
$100.00
$100.00
$100.00
10
11
12
13
14
15
$448.67
$371.11
$289.66
$204.14
$114.35
$20.07
$471.11
$389.66
$304.14
$214.35
$120.07
$21.07
$100.00
$100.00
$100.00
$100.00
$100.00
$21.07
Total Paid
$1,421.0718
What would that same
amortization table (also called a
schedule) look like if the interest
was compounded AFTER you paid,
rather than BEFORE you paid?
(this is a type 1 on Excel financial functions)
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Amortization table $1,000 loan, pay $100 year, 5% year interest
Year
Amount Owed
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Total Paid
$1,000.00
$945.00
$887.25
$826.61
$762.94
$696.09
$625.89
$552.19
$474.80
$393.54
$308.22
$218.63
$124.55
$25.78
Payment
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$100.00
$25.78
Amount Plus
Interest
$945.00
$887.25
$826.61
$762.94
$696.09
$625.89
$552.19
$474.80
$393.54
$308.22
$218.63
$124.55
$25.78
$0.00
$1,325.78
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The IPMT and PPMT Functions
(Introduction)
• Use IPMT to calculate the interest applicable
to a particular period
– Use the initial balance for the present value no
matter the period
• Use PPMT to calculate the principal applicable
to a particular period
• The arguments to both functions are the same
Interest Payment
IPMT(rate, per, nper, pv, [fv], [type])
Argument
Description
rate
Interest rate per compounding period
per
Period for which interest should be calculated.
nper
Number of compounding periods
pv
Present value
fv
Future value, residual left over after the loan is completed.
Could be a balloon payment. Can be omitted if = 0.
type
Designates when payments are made
Type 0 – end of period. Default.
Type 1 – beginning of period
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Principal Payment
PPMT(rate, per, nper, pv, [fv], [type])
Argument
Description
rate
Interest rate per compounding period
per
Period for which principal payment should be calculated.
nper
Number of compounding periods
pv
Present value
fv
Future value, residual left over after the loan is completed.
Could be a balloon payment. Can be omitted if = 0.
type
Designates when payments are made
Type 0 – end of period. Default.
Type 1 – beginning of period
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The CUMIPMT Function (Introduction)
• CUMIPMT calculates the cumulative interest
between two periods
• CUMPRINC calculates the cumulative
principal between two periods
• The arguments to both functions are the same
• Functions require the analysis tool pack add-in
• ALL 6 ARGUMENTS ARE REQUIRED, SCROLL
DOWN TO SEE TYPE!
Cumulative Interest Payments
CUMIPMT(rate, nper, pv, start_period, end_period, type)
Argument
Description
rate
Interest rate per compounding period
nper
Number of compounding periods
pv
Initial loan amount (Present value).
Start_period
Starting period. Begins at 1 and increments by 1.
End_period
Ending period. Begins at 1 and increments by 1
type
Designates when payments are made
Type 0 – end of period. Default.
Type 1 – beginning of period
TYPE IS A REQUIRED ARGUMENT – SCROLL DOWN TO SEE IT!
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Cumulative Principal Payments
CUMPPMT(rate, nper, pv, start_period, end_period, type)
Argument
Description
rate
Interest rate per compounding period
nper
Number of compounding periods
pv
Initial loan amount (Present value).
Start_period
Starting period. Begins at 1 and increments by 1.
End_period
Ending period. Begins at 1 and increments by 1
type
Designates when payments are made
Type 0 – end of period. Default.
Type 1 – beginning of period
TYPE IS A REQUIRED ARGUMENT – SCROLL DOWN TO SEE IT!
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