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

2. 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

3. 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

4. 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

5. 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, * 1%
= $10.201
4th Quarter
$1, * 1%
≈ $10.30
Financial Functions

6. Financial Functions

7. 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

8. 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

9. 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

10. 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