1. The University of California Berkeley Extension pmcdermott@peralta.edu Copyright © 2008 Patrick McDermott Andy Warhol Dollar Sign 1981

2. —Popeye’s friend Wimpy (J. Wellington Wimpy)

3. The Real Return  $100 next year is not the same as $100 today Especially since you might never see the money At a minimum, you could put it in the bank Real Return + Inflation + Risk of Default Express as a decimal fraction 7½%  0.075 For calculations, Add 1: 1 +.075 = 1.075  For multiple periods, use Power: 1.075^3  Divide into the Principal  Credit Cards use Division by Period

4. Present Value If you want a 10% return and get $1,000 for a bond on maturity: 1 Year: Present Value is 1000/1.10 = $909.09 2 Years: Present Value is 1000/1.10 2 = $826.45 3 Years: Present Value is 1000/1.10 3 = $751.31 But it’s more complicated if you receive a stream of income Who ya gonna call??? The PV function!!!

5. The Financial Functions PV returns the present value (the original loan amount or current value) for a loan, given the interest rate, the number of periods, and the periodic payment amount. Rate returns the periodic interest rate, given the number of payment periods, the payment amount, and the loan amount. Pmt returns the loan payment (principal plus interest) per period, assuming constant payment amounts and a fixed interest rate. PPmt returns the principal part of a loan payment for a given period, assuming constant payments and a fixed interest rate. IPmt returns the interest part of a loan payment for a given period, assuming constant payment amounts and a fixed interest rate. NPer returns the number of payment periods for a loan, given the loan’s amount, interest rate, and periodic payment amount.

6. The Parameters rate The interest rate. If it’s an annual rate & the payments aren’t annual, divide rate by the number of periods per year (if monthly, divide by 12 ). nper The total number of periods (& thus payments). per A particular period. Must be <= to nper. pmt The payment for each period (a constant value). pv The present value. For a loan, the amount. fv The future value after the last payment—any amount left over (balloon payment). Default: $0. type Payments are due either at the end of the period [0] or at the beginning [1]). Defaults to 0.

7. Find The Missing Number Find one, given the others If you want to know how much you should pay each month to pay off a loan over a certain number of years, use the Pmt() function If you want to know how much to pay for a bond that will redeem for a certain amount at maturity, use the PV() function If you want to know what interest rate will result in a certain payment, use Rate() – Iterative, so you can guess to reduce processing

8. The Functions  PV(rate,nper,pmt,fv,type)  Rate(nper,pmt,pv,fv,type,guess)  Pmt(rate,nper,pv,fv,type)  PPmt(rate,per,nper,pv,fv,type)  IPmt(rate,per,nper,pv,fv,type)  NPer(rate,pmt,pv,fv,type) X NOTE: a debt is considered Negative, so put a – in front of it.