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Part II
Working with Formulas and Functions
lender. When you invest money in a bank savings account, you’re a lender; you’re lending your money to
the bank, and the bank is borrowing it from you.
Several concepts contribute to the time value of money:
n Present Value (PV): This is the principal amount. If you deposit $5,000 in a bank savings
account, this amount represents the principal, or present value, of the money you invested. If you
borrow $15,000 to purchase a car, this amount represents the principal or present value of the
loan. Present Value may be positive or negative.
n Future Value (FV): This is the principal plus interest. If you invest $5,000 for five years and earn
6 percent annual interest, you receive $6,312.38 at the end of the five-year term. This amount is
the future value of your $5,000 investment. If you take out a three-year auto loan for $15,000
and pay 7 percent annual interest, you pay a total of $16,673.16. This amount represents the
principal plus the interest you paid. Future Value may be positive or negative, depending on the
perspective (lender or borrower).
n Payment (PMT): This is either principal or principal plus interest. If you deposit $100 per month
into a savings account, $100 is the payment. If you have a monthly mortgage payment of $825,
then $825 is made up of principal and interest.
n Interest Rate: Interest is a percentage of the principal, usually expressed on an annual basis. For
example, you may earn 5.5 percent annual interest on a bank CD (Certificate of Deposit). Or your
mortgage loan may have a 7.75 percent interest rate.
n Period: This represents the point in time when interest is paid or earned (for example, a bank CD
that pays interest quarterly or an auto loan that requires monthly payments).
n Term: This is the amount of time of interest. A 12-month bank CD has a term of one year. A 30-
year mortgage loan has a term of 30 years.
Loan Calculations
This section describes how to calculate various components of a loan. Think of a loan as consisting of the
following components:
n The loan amount
n The interest rate
n The number of payment periods
n The periodic payment amount
If you know any three of these components, you can create a formula to calculate the unknown component.
NOTE
NOTE The loan calculations in this section all assume a fixed-rate loan with a fixed term.
Worksheet functions for calculating loan information
This section describes five functions: PMT, PPMT, IPMT, RATE, and PV. For information about the argu-
ments used in these functions, see Table 16.1.

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