1. Agenda – 11/19/2013 Present Excel financial functions Discuss financial concepts that underlie functions  Specialized vocabulary  Must understand the vocabulary to understand the arguments required for the functions Do financial concept exercises 1

2. Some Excel financial functions 2 FunctionDescription CUMIPMT**Cumulative Interest Payments CUMPRINCCumulative Principal Payments FVFuture Value IPMT**Interest Payment IRRInternal Rate of Return NPERNumber of periods NPVNet Present Value PMT**Payment PPMT**Principal Payment PVPresent Value RATEInterest Rate SLNStraight Line Depreciation

3. 3 Excel Functions are just 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… 4

5. 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. 5

6. 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) 6

7. Simple vs. compound interest comparison YearSimple InterestCompound Interest 0$1,000 1$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 7 $1,000 Invested at 5% return

8. How much money would you have if you invested a total of $1000 for 5 years at an interest rate of 5% a year? 8 How much money would you have if you invested $1000 each and every year for 5 years at an interest rate of 5% a year?

9. Future Value Function ArgumentDescription rateInterest rate per compounding period nperNumber of compounding periods PmtPayment made each compounding period PvPresent value of current amount typeDesignates when payments or deposits are made Type 0 – end of period. Default. Type 1 – beginning of period 9 FV(rate, nper, pmt, pv, type)

10. If you receive $5000 5 years from now, and the “going” interest rate is 2.5%, how much is that money worth today? 10

11. Present Value Function ArgumentDescription rateInterest rate per compounding period nperNumber of compounding periods pmtPayment made each period fvFuture value of the amount received today typeDesignates when payments are made Type 0 – end of period. Default. Type 1 – beginning of period 11 PV(rate, nper, pmt, fv, type)

12. 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 5%, then you won’t pay back just $1,050 (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. 12

13. Amortization table $1,000 loan, pay $100 year, 5% year interest YearAmount OwedAmount 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$784.49$823.72$100.00 6$723.72$759.90$100.00 7$659.90$692.90$100.00 8$592.90$622.54$100.00 9$522.54$548.67$100.00 10$448.67$471.11$100.00 11$371.11$389.66$100.00 12$289.66$304.14$100.00 13$204.14$214.35$100.00 14$114.35$120.07$100.00 15$20.07$21.07 Total Paid$1,421.07 13

14. 14 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)

15. Amortization table $1,000 loan, pay $100 year, 5% year interest YearAmount OwedPaymentAmount Plus Interest 1$1,000.00$100.00$945.00 2 $100.00$887.25 3 $100.00$826.61 4 $100.00$762.94 5 $100.00$696.09 6 $100.00$625.89 7 $100.00$552.19 8 $100.00$474.80 9 $100.00$393.54 10$393.54$100.00$308.22 11$308.22$100.00$218.63 12$218.63$100.00$124.55 13$124.55$100.00$25.78 14$25.78 $0.00 Total Paid$1,325.78 15

16. Types of financial questions asked How much will it cost each month to pay off a loan if I want to borrow $150,000 at 4% interest each year for 30 years? (PMT function) Assume that you need to have exactly $40,000 saved 10 years from now. How much must you deposit each year in an account that pays 2% interest, compounded annually, so that you reach your goal of $40,000? (PMT function) If you invest $2,000 today and accumulate $2,676.45 after exactly five years, what rate of annual compound interest did you earn? (INTRATE function) 16

17. Payment function ArgumentDescription rateInterest rate per compounding period nperNumber of compounding periods pvPresent value fv Future value, residual left over after the loan is completed. Could be a balloon payment. Can be omitted if = 0. typeDesignates when payments are made Type 0 – end of period. Default. Type 1 – beginning of period 17 PMT(rate, nper, pv, fv, type)

18. Interest Payment 18 ArgumentDescription rateInterest rate per compounding period perPeriod for which interest should be calculated. nperNumber of compounding periods pvPresent value fv Future value, residual left over after the loan is completed. Could be a balloon payment. Can be omitted if = 0. typeDesignates when payments are made Type 0 – end of period. Default. Type 1 – beginning of period IPMT(rate, per, nper, pv, fv, type)

19. Principal Payment 19 ArgumentDescription rateInterest rate per compounding period perPeriod for which principal payment should be calculated. nperNumber of compounding periods pvPresent value fv Future value, residual left over after the loan is completed. Could be a balloon payment. Can be omitted if = 0. typeDesignates when payments are made Type 0 – end of period. Default. Type 1 – beginning of period PPMT(rate, per, nper, pv, fv, type)

20. Cumulative Interest Payments 20 ArgumentDescription rateInterest rate per compounding period nperNumber of compounding periods pvInitial loan amount (Present value). Start_periodStarting period. Begins at 1 and increments by 1. End_periodEnding period. Begins at 1 and increments by 1 typeDesignates when payments are made Type 0 – end of period. Default. Type 1 – beginning of period CUMIPMT(rate, nper, pv, start_period, end_period, type)

21. Determining Interest Rate 21 ArgumentDescription BeginDateSettlement Date – Date investment is made EndDateMaturity Date – Date when investment is mature PVInvestment Amount FVRedemption Amount BasisCalculation basis 0: US 30/360 1: Actual/Actual 2: Actual/360 3: Actual/365 4: European 30/360 INTRATE(BeginDate, EndDate, PV, FV, Basis)

22. Financial concept exercises For the two questions below, do the following:  First do the calculation.  Second, what Excel formula would you use to do the calculation for you? 1. If you borrow $1,000 for 5 years and pay 4% yearly interest compounded monthly, how much total interest will you pay? In addition to the two points above, what Excel function would calculate the payment for you? 2. If you invest $1,000 and receive 3% yearly interest compounded quarterly, how much money will you have at the end of 10 years? What Excel function will tell you how much money you earned in interest? 22