Microsoft Office Tutorials and References
In Depth Information
Working with Financial Functions
function and some of the other fi nancial functions often used to develop budgets. These
fi nancial functions are the same as those widely used in business and accounting to
perform various fi nancial calculations, such as depreciation of an asset, the amount of
interest paid on an investment, and the present value of an investment.
Figure 3-36
Financial functions for loans and investments
Function
Description
FV( rate , nper , pmt , [ pv=0] [, type =0])
Calculates the future value of an investment, where rate is the interest
rate per period, nper is the total number of periods, pmt is the payment in
each period, pv is the present value of the investment, and type indicates
whether payments should be made at the end of the period (0) or the
beginning of the period (1)
PMT( rate , nper , pv, [ fv=0] [, type =0])
Calculates the payments required each period on a loan or investment,
where fv is the future value of the investment
IPMT( rate , per , nper , pv, [ fv=0] [, type =0])
Calculates the amount of a loan payment devoted to paying the loan
interest, where per is the number of the payment period
PPMT( rate , per , nper , pv, [ fv=0] [, type =0])
Calculates the amount of a loan payment devoted to paying off the principal
of a loan
PV( rate , nper , pmt , [ fv=0] [, type =0])
Calculates the present value of a loan or investment based on periodic,
constant payments
NPER( rate , pmt , pv, [ fv=0] [, type =0])
Calculates the number of periods required to pay off a loan or investment
RATE( nper , pmt , pv, [ fv=0] [, type =0])
Calculates the interest rate of a loan or investment based on periodic,
constant payments
The cost of a loan to the borrower is largely based on three factors: the principal, the
interest, and the time required to pay back the loan. Principal is the amount of money
being loaned, and interest is the amount added to the principal by the lender. You can
think of interest as a kind of “user fee” because the borrower is paying for the right to
use the lender’s money for a period of time. A few years ago, Diane and Glenn borrowed
money to buy a second car and are still repaying the bank for the principal and interest
on that loan. On the other hand, Diane and Glenn have also deposited money in their
main savings account and receive interest payments from the bank in return.
Interest is calculated either as simple interest or as compound interest. In simple
interest , the interest is equal to a percentage of principal for each period that the money
has been lent. For example, if Diane and Glenn deposit $1,000 at a simple interest rate
of 5 percent, they will receive $50 in interest payments each year. After one year their
investment will be worth $1,050, after two years it will be worth $1,100, and so forth.
With compound interest , the interest is applied not only to the principal but also to
any accrued interest. If Diane and Glenn deposit $1,000 in a bank at 5 percent annual
interest compounded every year, they will earn $50 in the fi rst year, raising the value of
the account to $1,050. If they leave that money in the bank for another year, the interest
payment in the second year rises to 5 percent of $1,050 or $52.50, resulting in a total
value of $1,102.50. So they earn more money the second year because they are
receiving interest on their interest.
Compound interest payments are divided into the period of time in which the interest
is applied. For example, an 8 percent annual interest rate compounded monthly results
in 12 interest payments per year with the interest each month equal to 1/12 of 8 percent,
or about 0.67 percent per month.
Another factor in calculating the cost of a loan is the length of time required to pay it
back. The longer it takes to pay back a loan, the more the loan costs because the
borrower is paying interest over a longer period of time. To save money, loans should be
paid back quickly and in full.
 
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