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

or negative.

•
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.

Loan Calculations

This section describes how to calculate various components of a loan. Think of a loan as consisting of the fol-

lowing components:

• 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