1 CSE 2337 Chapter 6 Financial Calculations

2 Interest Factors –Time –Risk –monetary policies Ways interest is calculated –simple –compound

3 Simple Interest Paid solely on the amount of the original principal value Simple interest = Principal * Interest rate per time period * Number of time periods

4 Compound Interest Adding interest earned each period to the principal for purposes of computing interest for the next period Has greater total value than simple interest Used by most financial institutions Annual percentage yield (APY) –Equivalent yearly simple interest rate, taking compounding into account Annual percentage rate (APR) –Reflects interest being paid on actual amount borrowed

5 PMT Finds value of payment per period, assuming are constant payments and constant interest rate for duration of loan PMT(rate,nper,pv,fv,type)

6 PMT Arguments rateInterest rate per compounding period nperNumber of compounding periods pvPresent value fvFuture value (compounded amount) typeDesignates when payments are made Type 0 – end of period Type 1 – beginning of period

7 Example 1,000,000 Loan, 8% rate, compounded quarterly, over 5 years

8 Cell Referencing

9 Other Financial Functions

10 Other Loan Options Down paymentAdjust present value (pv) to reflect exact value of the loan Balloon paymentSpecify negative future value (fv) Mortgage feesAdjust the pv of the loan by subtracting the fees from the loan amount Recalculate the interest rate using the same payments and loan periods, with the new pv amount

11 Amoritization Table

12 Principal and Interest Payments PPMT function –Calculates the value of the principal payment for a specified period –PPMT(rate,per,nper,pv,fv,type) IPMT function –Calculates the value of the interest payment for a specified period –IPMT(rate,per,nper,pv,fv,type)

13 Arguments to PPMT and IPMT rateInterest rate per period perPeriod for which interest or principal amount will be calculated nperTotal number of periods in the financial transaction pvValue at the beginning of the financial transaction fvValue at the end of the financial transaction typePayment type of 0 or 1 (made at beginning or end of each period, respectively)

14 Calculating Prin. and INT. Between Periods CUMIPMT function –Automatically calculates interest values between two periods –CUMIPMT(rate,nper,pv,start_period, end_period,type) CUMPRINC function –Automatically calculates principal values between two periods –CUMPRINC(rate,nper,pv,start_period, end_period,type)