Microsoft Office Tutorials and References
In Depth Information
• Present value (PV): This is the principal amount. If you deposit $5,000 in a bank savings account, this
amount represents the principal, or present value, of the money you invested. If you borrow $15,000 to pur-
chase a car, this amount represents the principal, or present value, of the loan. Present value may be positive
• Future value (FV): This is the principal plus interest. If you invest $5,000 for five years and earn 3% annu-
al interest, your investment is worth $5,796.37 at the end of the five-year term. This amount is the future
value of your $5,000 investment. If you take out a three-year car loan for $15,000 and make monthly pay-
ments based on a 5.25% annual interest rate, you pay a total of $16,244.97. This amount represents the prin-
cipal plus the interest you paid. Future value may be positive or negative, depending on the perspective
(lender or borrower).
• Payment (PMT): This is either principal or principal plus interest. If you deposit $100 per month into a sav-
ings account, $100 is the payment. If you have a monthly mortgage payment of $1,025, this amount is made
up of principal and interest.
• Interest rate: Interest is a percentage of the principal, usually expressed on an annual basis. For example,
you may earn 2.5% annual interest on a bank CD (certificate of deposit). Or your mortgage loan may have a
6.75% interest rate.
• Period: This represents the point in time when interest is paid or earned: for example, a bank CD that pays
interest quarterly or an auto loan that requires monthly payments.
• Term: This is the amount of time of interest. A 12-month bank CD has a term of one year. A 30-year mort-
gage loan has a term of 360 months.
This section describes how to calculate various components of a loan. Think of a loan as consisting of the fol-
• The loan amount
• The interest rate
• The number of payment periods
• The periodic payment amount
If you know any three of these components, you can create a formula to calculate the unknown component.
The loan calculations in this section all assume a fixed-rate loan with a fixed term.
Worksheet functions for calculating loan information
This section describes six commonly used financial functions: PMT, PPMT, IPMT, RATE, NPER, and PV. For
information about the arguments used in these functions, see Table 11-1.
Table 11-1: Financial Function Arguments