1

CSE 2337Chapter 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

rate Interest rate per compounding period

nper Number of compounding periods

pv Present value

fv Future value (compounded amount)

type Designates when payments are madeType 0 – end of periodType 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 payment • Adjust present value (pv) to reflect exact value of the loan

Balloon payment

• Specify negative future value (fv)

Mortgage fees • Adjust 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

rate Interest rate per period

per Period for which interest or principal amount will be calculated

nper

Total number of periods in the financial transaction

pv Value at the beginning of the financial transaction

fv Value at the end of the financial transaction

type Payment 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)