PRACTICE PROBLEM 8.1 FINANCIAL FUNCTIONS PRACTICE SOLUTION
1. You are investing $5000 into a savings plan today and will make quarterly contributions of $100 per
quarter. The plan pays 6% interest per year compounded quarterly. Write an Excel formula to
determine how much your savings will be worth in 5 years.
=FV(.06/4, 4*5, -100, -5000)
2. Write an Excel formula to determine the yearly interest rate being charged by the bank on your
$175,000 30- year mortgage. You make a monthly mortgage payment of $2000 and the value of the
loan at the end of thirty years is zero. Interest is compounded monthly.
= RATE(30*12, -2000, 175000,0,0) *12 (Last 2 arguments are optional)
3. Write an Excel formula to determine the value today of $1000 invested 2 years ago at 12% per year
compounded quarterly.
=FV(.12/4, 2*4, 0, -1000,0)
(Last argument is optional)
4. Write an Excel formula to determine the monthly car payment that will be required to take a $10,000
loan over 4 years. The rate of loan is %15 compounded monthly
= PMT(.15/12, 4*12, 10000,0,0) (Last 2 arguments are optional)
5. (a) Write an Excel formula to determine the amount of money I need to invest today at 6% per year
compounded monthly to have $5000 in three years. I plan on making additional monthly payments of
$25 into the account each month.
=PV(.06/12, 3*12, -25, 5000,0)
(Last argument is optional)
(b) Rewrite the formula to determine how much I would need to invest if I do not plan on making
additional monthly payments.
=PV(.06/12, 3*12, , 5000,0) also =PV(.06/12, 3*12,0 , 5000,0)
6. Write an Excel formula to determine the number of years it would take you to pay off a loan for the
following: You are buying a Jeep for $23,500 with a $2000 down payment. The rest you are borrowing
from the bank at 6.5% annual interest compounded monthly. Your monthly payments are $350.
=NPER(.065/12, -350, 23500-2000,0,0)/12
(Last 2 arguments are optional)
7. When expressing CASH FLOW in EXCEL financial formulas - Cash out of your pocket is expressed as a
NEGATIVE (negative/positive)
8. Sometimes these financial functions have a “type” argument at the end of the formula
What does “type” mean? What are the different types?
TYPE 0 – INTEREST PAID/ACCRUES AT THE END OF THE PERIOD
TYPE 1 – INTEREST PAID/ACCRUES AT THE BEGINNING OF THE PERIOD
9. You found a cookie jar with a bank note in it from 1900. The value in 1900 was $100 and the bank which
is still in existence promises to pay 3% per year compounded annually. What is it worth now?
= FV(.03, Current Year - 1900, 0, -100,0)
(Last argument is optional)
10. You decided to take a mortgage with a balloon payment – the mortgage is $100,000 at 6% annual
interest compounded monthly for 20 years. The amount I have to pay (balloon) in 20 years is $10,000.
What is the payment I can expect each month?
=PMT(.06/12, 20*12, 100000, -10000,0)
(Last argument is optional)
11. You have a student loan for $5000 at 4.5% interest. No payment is required for 2 years but the loan
accrues interest monthly. Once you begin paying the loan you have 10 years to finish payments.
Calculate the monthly payment. (Hint: try nesting your financial functions)
=PMT(.045/12, 10*12, -FV(.045/12, 2*12,,5000,0),0)
(Last 2 arguments are optional)
**Note – Since we are making payments the PMT function should return a negative value. Depending
on how you look at the problem. To do this a negative value will be needed as the PV argument of the
PMT function. Since this PV argument is the nested FV formula, one way to do this is to put a negative
sign in front of FV(.045/12,2*12,,5000).
PV-YR 0
FV - YR 2
PV – YR 0
YR 12-FV YR 10