Financial Functions
• Functions that can be used to calculate values
based on compounded interest
– Taking a loan
– Investing in a savings account
Financial Functions
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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
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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
Simple Vs. Compound Interest
$1,000 after 2 Years at 4%
$82.00
$81.50
$81.00
$80.50
$80.00
$79.50
$79.00
Simple Interest
Compound Interest
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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
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Compounding Interest Quarterly
What if we compound our 4% interest quarterly for the $1,000.
This would be four separate calculations
Quarter
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Principal
$1,000 * 1%
$1,010 * 1%
$1,020.10 * 1%
$1,030.301 * 1%
Financial Functions
Interest
= $10.00
= $10.10
= $10.201
≈ $10.30
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Financial Functions
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Financial Functions
• Present Value (PV)
– 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
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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
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Arguments in Financial Functions
Argument 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)
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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
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