Report

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 2 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 3 Excel Functions are Excel Functions To use them, you must understand the TIME VALUE OF MONEY 4 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… 5 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. 8 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) 9 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 10 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 12 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 13 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 14 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. 17 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) 19 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 20 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 22 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 23 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! 25 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! 26