Financial Functions Functions that can be used to calculate values based on compounded interest Taking a loan Investing in a savings account Financial Functions

Simple Interest vs. Compound Interest Simple interest always calculates interest based on the original amount. So $1,000 at 4% per year for 2 years Year 1: $1000 * 4%  $40 in interest for the 1st year. Year 2: $1000 * 4%  $40 in interest for the 2nd year. After 2 years you would have: $1,000 * 4% = $80 interest For a total of $1,080 Financial Functions

Simple Interest vs. Compound Interest Compound interest always calculates interest based on the “latest amount”. So $1,000 at 4% per year for 2 years compounded Yearly Year 1: $1,000 * 4%  $40 in interest for the 1st year. Year 2: $1,040 * 4%  $41.60 in interest for the 2nd year. After 2 years you would have: $1,000 * 4% = $81.60 interest For a total of $1,081.60 Financial Functions

Compounding Periods Compounded Yearly Compounded Quarterly Compounded Semi-Annually Compounded Monthly The total amount of your financial transaction will be different based on when the interest is compounded. Financial Functions

Compounding Interest Quarterly What if we compound our 4% interest quarterly for the $1,000. This would be four separate calculations Quarter Principal Interest 1st Quarter $1,000 * 1% = $10.00 2nd Quarter $1,010 * 1% = $10.10 3rd Quarter $1,020.10 * 1% = $10.201 4th Quarter $1,030.301 * 1% ≈ $10.30 Financial Functions

Financial Functions

Financial Functions Present Value (PV) Future Value (FV) Payment (PMT) What you get/pay at the beginning of the financial transaction Future Value (FV) What you are going to get OR what you will have to pay at the end of the financial transaction Payment (PMT) Payment made each period. It remains constant over life of annuity RATE Interest rate per period NPER Number of payment periods Financial Functions

Financial Functions-Syntax =PV(rate, nper, pmt, [fv], [type]) =FV(rate, nper, pmt, [pv], [type]) =PMT(rate, nper, pv, [fv], [type]) =RATE(nper, pmt, pv, [fv], [type], [guess])*Compounding Periods =NPER(rate, pmt, pv, [fv], [type]) / Compounding Periods Financial Functions

Arguments in Financial Functions Description Argument Rules rate Interest rate per compounding period Always divide the rate by the number of compounding periods Rate/ # of compounding periods nper Number of compounding periods Always multiply the number of years by the compounding period # of compounding periods * # of years pmt Periodic payments to the initial sum Payment amount cannot vary pv Original value of financial transaction fv Value at the end of the financial transaction type Designates when payments are made 0: Payments are made at the end of the period 1: Payments are made at the beginning of the period (0 is the default and is implied) Financial Functions

Using Financial Functions Arguments Use consistent signs Outgoing cash ( - ) Incoming cash ( + ) For arguments that are zero, at least a comma must be put in the function to maintain the argument order, unless no other non-zero arguments follow. =PV(.03, 2, 0, 5000, 0) same as =PV(.03, 2, , 5000) Financial Functions