Introduction to

Financial Functions
do Excel
 Bertolo Introduction to Excel Financial Functions

Chapter 1

Introduction to Financial Functions of

Excel
IN THIS CHAPTER
Introducing the fundamental concept of the time value of money
Using the basic financial functions of Excel: PV, FV, NPER, PMT, and RATE
Converting effective and nominal interest rates
Calculating effective loan costs using different rate quotation systems
Calculating the accumulated payments of interest and principal using the CUMIPMT function and
CUMPRINC
Matching different interest and payment frequencies
Understanding the limitations of the VP, VF, NPER, PGTO, TAXA, CUMIPMT, and CUMPRINC functions

It is quite certain that most common uses of Excel are for performing calculations involving money.
Every day, people make hundreds of thousands of financial decisions based on the numbers that are
calculated in a spreadsheet. These decisions range from a simple one (Can I afford to buy a
new car?) up to a complex one (Acquiring Corporation XYZ will result in a positive cash flow in
next 18 months?). This is the first of three chapters that discusses financial calculations that you can
to carry out with the assistance of Excel.

Basic Financial Functions of Excel

This chapter presents many examples that use five basic financial functions of Excel.
The syntax for these functions is shown here (arguments in bold are required arguments):
VP(rate, nper, payment, fv, type)
FV(rate, nper, pmt, pv, type)
PGTO(taxa,nper,vp, vf, tipo)
RATE(nper, pmt, pv, fv, type, guess)
NPER(rate, payment, present_value, future_value, type)

As you will see, these functions are extremely flexible and are useful for a wide variety of
problems. To use these functions effectively, you will need to understand three basic concepts:
Mark the cash flows as positive or negative
The basic concept of the time value of money
The concept of equivalent interest rates
These concepts are all covered in this chapter and will be put to use later in the chapters.
subsequent.

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Basic Terminology
Present Value (PV): This is the principal amount. If you invest $5,000 in a CD
(Bank Deposit) certificate, this amount represents the principal, or present value,
of the money you invested. If you borrowed $15,000 to purchase a
car, this amount represents the principal or present value of the loan. Present Value
it can be positive or negative.
Future Value (FV): This is the principal plus the interest. If you invest $5,000 for five years
and earn 6% annual interest, you will receive $6,312.38 at the end of the five-year term. The
amount is the future value of your $5,000 investment. If you can secure a loan
for three-year cars worth $15,000 and pay 7% annual interest, you will pay
a total of $16,673.16. This amount represents the principal plus the interest you paid.
The Future Value can be either positive or negative.
Payment (PGTO): This is either the principal or the principal plus interest. If you deposit
$100 a month in a savings account, $100 is the payment. If you have a
payment of $825 on a mortgage, the $825 consists of principal and interest.
Interest rate: Interest is a percentage of the principal, usually expressed on a basis
annual. For example, you could earn 5.5% annual interest on a bank CD. Or your
the mortgage may have an interest rate of 7.75%.
Period: This represents the moment when interest is paid or earned. For example,
a bank CD that pays interest quarterly or a vehicle loan that requires
monthly payments.
Term: This is the amount of interest time. A 12-month CD has a term of one year.
A 30-year mortgage has a term of 30 years.

Convention for Marking Money Flows

Look at your bank statement, and it will be clear that money flows!
When it comes to Excel's financial functions, it is critical that you understand how to 'flag' the flows of
box. In other words, will you use the positive or negative sign?

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The relationship between NPER, PMT, and RATE

Excel does not "know" anything about different time periods such as months, weeks, or
years. He merely counts them and waits for you to label them appropriately and be sure that you do not
mixture.
The associated diagram represents the concept of the time value of money used by the functions of
Excel VP, FV, PMT, NPER, and RATE. The arrows represent cash flows, and their direction (positive
or negative). Any problem with a solution consists of four known variables and one variable
unknown. The unknown variable is the name of the function, and the known variables represent the
function arguments.
The diagram should represent the balance in terms of discounted or accumulated flows, negative and positive.
the concept allows only a single interest rate, which must be the effective rate for the period of
time measured by NPER. Similarly, only one payment level is allowed, and this must be
for a period of time measured by NPER. The Type argument in the concept shows whether the payments
are anticipated or postponed.
If you can fill in four of the five variables, Excel can solve the problem. There is a
exception: If payments are involved, Excel needs to know when the payments occur (this
and the argument Type).

To solve financial problems using Excel's basic financial functions, you need to execute
two preliminary steps:
1. Determine the cash flow perspective of the creditor. For example, in a capitalization problem.
Simple, are you observing it from the perspective of the depositor or the bank? In a mortgage problem,
will you be the debtor, or the creditor? When calculating the value of a series of future payments, you are the
buyer (the payment comes from the right to receive), or you are the seller (receiving a payment for
grant that right)?
2. Determine if any particular present value, payment, or future value comes to you (signal
positive), or it depends on you (negative signal).

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When you have a company negotiating with these two points, you will be able to use the functions.
Excel financial functions to create effective financial formulas — and be able to interpret the results
returned by the formulas.
Generally, money that comes in for you is assumed to have a positive sign. Money that goes out of you is
assumed to be negative. For example, if a present value problem returns a negative value, it means
that this amount is paid at time zero. If it is positive, the money is received. Consider a
example of mortgage payment calculation. If you are the borrower, the loan 'comes
for you,” and the calculated payments will have a negative sign (which indicates that you paid them).
When calculating the interest rate on a mortgage loan, you should be careful about the sign.
loan amount and the payments appropriately. Otherwise, Excel will assume that they are all
in one direction and will generate an error. For example, the formula must show

#NUM!, which indicates an infinitely high return rate (everything will come to you and nothing will be paid for it).

Accumulation, Discount and Amortization Functions

This section contains several examples that demonstrate the use of the five basic functions of Excel to solve
capitalization and amortization problems. Although the trend is to observe amortization and capitalization
as separate problems, they are essentially the same. In fact, the only difference is in the sign of the
cash flows.
We can classify these problems into simple and complex problems. In simple problems, we deal with
with only two of the three cash variables (present value, payment, and future value). In problems
complex, we deal with all three.
Although we classify these as simple and complex problems, Excel still requires a value for
all three box variables. Therefore, we use zero for the 'missing' element.
Simple Capitalization Problems
This section contains seven examples that demonstrate simple capitalization issues.

All the examples in this section are available in the Functions Folder Spreadsheets
Excel financials that accompany.

EXAMPLE 1
Investing $1,000 in a savings account, what will be the accumulated amount after two years, at interest?
of 6% per year?
Figure 1-1 shows this problem set up in a spreadsheet.

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Figure 1-1: Calculating a future value

Required function: FV(rate; nper; pmt; pv; type)

This formula returns $1,123.60:
=VF(6%;2,0;-1000;0)

The example formulas in this chapter use severely hard-coded values for the
function arguments. The examples in the Financial Functions folder of Excel use
cell references for the function arguments.

Note that this problem is established from the perspective of the depositor. Therefore, the initial deposit (the
the argument vp) is negative. No regular payment is made, so the argument is 0. With none
payment, the type argument is irrelevant.

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When entering numeric data as arguments for the function, make sure not to
insert thousand separators. For example, type 1000, not 1,000.
Depending on your regional settings, the thousand separators may be the same.
characters of argument separators.
EXAMPLE 2
If $1,000 grew to $2,000 in nine years, what was the average annual growth rate?
Required function: RATE(nper;payment;pv;fv; type;estimate)
This formula returns 8.005974%:
=RATE(9,0,-1000,2000,0)
This example is from the perspective of the depositor, so the vp argument is negative and the vf argument (a right
receiving) is positive. Since the term is expressed in years, the rate is the effective annual rate.
EXAMPLE 3
Depositing $100,000 and earning 4% per year, how long will it take for me to become a millionaire?
Required function: NPER(rate; payment; present_value; future_value; type)

This formula returns 58.71:

=NPER(4%;0;-100000;1000000;0)
This example is from the perspective of the depositor. Therefore, the negative argument and the vf argument (the
the right to receive $1 million is positive.
Due to the rate being quoted in effective annual terms, the result is in years.
EXAMPLE 4
If I have R$125,463.45 in my account and I earned 2% interest per monthduring 12 months, what was the
original deposit?
Required function: PV(rate; nper; pmt; fv; type)
This formula returns -R$98,927.07:
=VP(2%;12;0;125463.45;0)
With no regular payments, the argument payment is 0 and the argument type is irrelevant.
Due to the R$125,463.45 in the account being a receivable right, the argument vf carries a positive sign and the amount.
calculated present is negative.
EXAMPLE 5
If I deposit $200 a month (starting today) into an account earning 1.5% per month, how much will I have after three months?
years?
Required function: FV(rate; nper; payment; pv; type)
This formula returns $8,172.96:
=VF(1.5%;36;-200;0;1)
In this example, the term is quoted in years, but the interest and payments are monthly. This requires a calculation.
preliminary. The most direct approach is to convert years into months. Another option is to convert the rate of
interest for an effective annual rate, and then convert the $200 to an equivalent amount per year. This
it will produce the same result, but it is an overly complicated approach.
Note that payments start 'today' and are therefore advanced. Consequently, the typical argument is
No present balance is established, so the vp argument is 0.

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In all the previous examples, the questions can be reformulated in such a way that the negatives become
positives, and the positives become negatives. Therefore, Example 1 can be reformulated as follows.
EXAMPLE 6
Borrowing $2,000 for four years at 5% interest, how much will you have to pay back?
Required function: FV(rate; nper; pmt; pv; type)
This formula returns -$2,431.01:
=VF(5%;4;0;2000;0)
Here the issue is from the perspective of the borrower, and the formula has been modified so that the loan
initially taken (the vp argument) is positive. No regular payment has been made, so the
the argument type is 0. With no payment, the argument type is irrelevant.
Examples 2 to 5 can also be reformulated like this: The depositor becomes the borrower of the
loan, and the borrower becomes the depositor.
EXAMPLE 7
If $1,000 capitalized to $4,000 in nine years, what was the average annual growth rate?
Required function: RATE(nper; payment; present_value; future_value; type; estimate)

This formula returns 16.652904%.

TAXA(9;0;-1000;4000;0)
This example is from the perspective of the depositor. Therefore, the vp argument is negative and the vf argument (a
the right to receive) is positive. Due to the term being expressed in years, the rate is the effective rate per year. With
no regular payment, the argument is 0 and the argument type is irrelevant.

An important characteristic of financial calculations is that they can be verified.

to establish the accuracy of the response. This can be done 'outside the spreadsheet' using a
financial calculator, or it can be done using the underlying formula or another function.
The following steps demonstrate a method to verify the result of 16.652904% for this example:
[Link] how much $1,000 accumulates in nine years at the calculated rate. This formula returns $4,000:
=VF(16.652904%;9;0;-1000;0)
[Link] the present value of $4,000, discounted at the rate calculated over nine years. The following formula returns
-$1,000
VP(16,652904%;9;0;4000;0)
3. Calculate how long it takes for $1,000 to accumulate to $4,000 at the calculated rate. The following formula returns
eight
=NPER(16,652904%;0;-1000;4000;0)
4. Calculate the result using the following formula, which returns 16.652904%:
=(4000/--1000)^(1/9)-1
One technique for cross-checking is to compare the verified calculation with the original data in such a way that
that the method produces an error of 0. In all previous checks, subtracting the original data from
verification calculation produces a zero error. If all calculations are verified and the errors calculated
In this way, the sum of all errors in a spreadsheet will approximate zero. It is unlikely to be exactly zero.
due to rounding errors.

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The examples in the Financial Functions Workbook of Excel contain formulas for
error checking.
Complex Capitalization Problems
This section describes four examples of complex capitalization problems. There are two types of
complex capitalization problems:
Problems that do not have null values for any two of the key parameters (present value,
payment, and future value), and requires a solution for the third parameter.
Problems that have non-null entries for all three parameters (present value, payment, and value)
future), and requires a solution either for the RATE or NPER.

Todos os exemplos nesta seção estão disponíveis nas Planilhas da Pasta Funções
Excel financials, along with cross-checking to ensure their accuracy.

EXAMPLE 8
With an initial balance of $25,500 and payments of $1,500 per month (at the end of each month), how much do I...
How much will I accumulate in three years if I earn 0.85% per month?

Figure 11-2 shows this example, assemble it in a spreadsheet.

Figure 1-2: Calculating a future value

Required function: FV(rate; nper; pmt; pv; type)
This formula returns $97,447.44:

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=VF(,85%;36;-1500;-25500;0)
The negative sign for the vp argument can be confusing, because it represents a current balance (a right to
receive). However, because we are looking ahead in time, it is treated as a deposit.
Payments and fees are quoted on a monthly basis; therefore, the three-year term must be converted to
months. OVFé returned as positive, which is a right to receive.
EXAMPLE 9
My bank balance six years ago was $15,000, and I added $2,500 at the end of each year. The balance
The current amount is $50,000. What was my average annual return?

Required function: RATE(nper;payment;pv; fv; type; guess)

This formula returns 12.049840%:
=TAXA(6;-2500;-15000;50000;0;0)

TAXA is a particularly powerful function, as the solution can only be obtained

per iteration. It is only rarely necessary to insert an estimated rate as the sixth argument
optional. If omitted, Excel provides the default estimate of 0.
EXAMPLE 10
My account had a debit of $12,000 and I deposit $1,000 at the end of each month. How long will it take?
How long will it take for me to become a millionaire if I earn an average return of 0.6% per month?
Required function: NPER(rate, payment, present_value, future_value, type)
The following formula returns 390.01 months:
=NPER(0,8%;-500;15000;1000000;0)
Note that the question is formulated in such a way that the debit is a deposit. Therefore, it requires the negative sign to
the vp argument.
If the negative balance is seen as a loan, the future value will be positive. In such a case, two calculations
they would be required if the negative balance rate is not equal to the deposit rate. First, we would calculate the time
raised to reach zero balance, and then we would calculate the time to reach $1 million.
Using rates of 0.9% for the negative balance and 0.6% for deposits, this formula returns 463.90 months:
=NPER(0,9%;-500;15000;0;0)+NPER(0,6%;-500;0;1000000;0)
EXAMPLE 11
Deposit $1,000 per month (at the end of each month) I intend to do this for the next ten years. If I need
To accumulate $1,000,000, how much should I deposit now if the account earns 0.5% per month?
Required function: PV(rate; nper; pmt; fv; type)
This formula returns -$459,559.28:
=VP(0.5%;120;-1000;1000000;0)
We need to convert years to months to ensure the adequacy of the payment, rate, and nper arguments.
If you work on the first 11 examples, you should have understood the process:
1. Determine the required functions.
2. Determine the signs of the inputs payment, vp, and vf.
3. Ensure that the interest rate periods, nper, and payment are the same (or convert them to make them the same).

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4. Insert the arguments in the correct order (preferably using cell references).
5. Consider the meaning of the response.
6. Determine what function or calculations are required for a cross-check.
[Link] sure the error approaches zero.

Simple Discount Problems

You can think of the discount as 'the inverse of capitalization or accumulation.' Instead of capitalizing a
present value for a future amount, we will be determining the present value of a future sum.
Like with capitalization, we may have problems that involve two or three of the monetary values VP,
VF, or PGTO. Where only two are involved, we will call it simple discount when all of them
if three are involved, we will call them complex discount.

All examples in this section are available in the Functions folder spreadsheets.
Excel financial functions. Each example also includes a cross-check to ensure that
precision of calculations.
EXAMPLE 12
What is the present value of the right to receive $25,000 in five years, discounted at 6.5% per year?
Figure 11-3 shows this example, set it up in a spreadsheet.

Figure 1-3: Calculating a present value

Required function: PV(rate; nper; pmt; fv; type)
This formula returns –$18,247.02:

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NPV(6.5%;5;0;25000;0)
Note the logic of the signals. If we have a right to receive, the argument vf is positive - we must pay at
present to receive this positive right in the future.
Without any payment, the type argument is irrelevant.
The accuracy of the calculations can be ensured by cross-checking the response with another function. In this
In this case, we can verify if $18,247.02 will accumulate to $25,000 in five years at 6.5%. The formula
the following cross-check really returns $25,000:
=VF(6.5%;5;0;-18247.02;0)
EXAMPLE 13
A property generates a rent of $25,000 over the next 25 years. If I discount it at 8%, how much do I
Should I pay for it? Assume a value of zero after 25 years and that the rent is paid in arrears.
annually.
Required function: PV(rate, nper, pmt, fv, type)
The following formula returns –$266,869.40:
=VP(8%;25;25000;0;0)
This result can be verified using the RATE function. This formula returns 8.00%:
=TAXA(25;25000;-266869,40;0;0)
Typically, real estate payments are made in advance. In such a case, Example 13 would be modified.
making the argument Type equal to 1.
EXAMPLE 14
Assume that in Example 13 the rental of $25,000 is received in perpetuity. If we discount it at 8%,
how much should be paid?
This is an example of a discount problem that Excel cannot solve using its functions. The problem
We cannot use 'perpetuity' as the nper argument. The solution is to use a period of time.
very long, such as 1,000 years. The result is certainly accurate enough for most of the
purposes.
Required function: PV(rate; nper; payment; fv; type)
The following formula returns –$312,500.00:
=VP(8%;1000;25000;0;0)
Another option is to use a formula to calculate the present value:
VP = PAYMENT/RATE
For this example, the following formula returns $312,500.00:
=25000/0,08
Note that the sign is different because the formula did not strictly adopt the sign convention.
If the rent is paid in advance, we merely adapt this approach by "cheating" and using 1 for the
Type argument. The following formula returns $337,500.00:
=VP(8%;1000;25000;0;1)
The approach to the formula is varied, and the general formula for evaluating anticipated profits is as follows:
VP = PGTO*(1+RATE)/RATE

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For this example, the following formula returns $337,500.00:
=25000*(1+0.08)/0.08
Other examples can be expressed in terms of discount, but we will cover them later in the section
Simple Capitalization Problems
EXAMPLE 15
A property is currently worth $2,000,000 and is subject to a lease for five years. The buyer
paid $1,750,000 for it. Assuming no future growth in value, what was the discount rate?

Required function: RATE(nper;payment;pv;fv; type;guess)

The following formula returns 2.706609%:
=TAXA(5;0;-1750000;2000000;0)
The payment today represents a negative present value. The amount in five years is a right (positive) to
receive.
To verify the answer, use this formula (which returns $2,000,000.03):
=VF(2.706609%;5;-1750000;0)
The rounding error is caused by limiting the rate to only six decimal places.
Normalmente, o argumento seria uma célula de referência, não um valor fixado.
EXAMPLE 16
A tenant was interested in a property that was recently sold for $230,000.
The lease lasted four years and cost $6,000 per month paid in advance without revision.
leasing or scaling. If we accept a profitability of 0.75%, what is the rental profit?
rent) that was presented by the transaction? Rental profit is the rental value minus the lease
payment.

Required function: PMT(rate; nper; pv; fv; type)

The following formula returns $5,680.95 (rental profit):
=PMT(0.75%;48;-230000;0;1)
Adding to the paid rent ($6,000) produces a rental value of $11,680.95.

Complex Discount Problems

Complex discount problems involve the use of three monetary amounts: present value, payment, and
future value. The examples of complex discount in this section are essentially reformulations of
complex capitalization problems.

All the examples in this section are available in the Functions Folder Sheets.
Excel financials.
EXAMPLE 17
If I discount at 0.75% per month, how much should I pay for a property yielding $25,000 per month?
anticipated (which I estimate will be worth $5,000,000 in five years)?
Required function: PV(rate; nper; payment; fv; type)
The following formula returns –$4,406,865.34:

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=VP(0.75%;60;25000;5000000;1)
This example uses the monthly rate, and the payments are monthly. Therefore, the nper argument has been converted.
for months.
We can verify this calculation using the RATE function. The following formula returns 0.75%:
=TAXA(60;25000;-4406865,34;5000000;1)
EXAMPLE 18
I paid $1,200,000 for a property that generates a rent of $12,000 per month in advance. If I
sell it in five years for $1,500,000, what profit will I receive?
Required function: RATE(nper;payment;pv;fv;type;guess)
The following formula returns 1.29136%:
=TAXA(60;12000;-1200000;1500000;1)
This result can be verified using the VP function. The following formula returns -$1,200,000.00:
=VP(1,29136%;60,12000;1500000;1)
It is important to understand that the rent is quoted monthly and in advance, but the term is five years. This
discrepancy is resolved by converting years to months.
Therefore, the formula returns a monthly interest rate.

Note that the rent is not converted to an annual rent. This is because a rent of
$12,000 per month in advance is not the same as $144,000 per year in advance.
In order to obtain the equivalent annual amount, we would need to know the discount rate — which is
a little bit of information that we are trying to calculate.
EXAMPLE 19
A property was purchased for $1,600,000. It brings in a rent of $10,000 per month in advance. If
I am sure of an income of 1% per month, how much should the property be worth in five years when
I plan to sell it.
Required function: VF(rate; nper; payment; pv; type)
This formula returns $2,081,851.05:
=VF(1%;60;10000;-1600000;1)
This result can be verified using the following formula (which returns -$1,600,000):
=VP(1%;60;10000;2081851.05;1)
Amortization Problems
Amortization is a term given to the process of paying back loans. In this chapter, in fact, it has already been
covered most of the required calculations, but the problems were expressed in terms of capitalization.

All the basic examples in this section are available in the Functions Folder Spreadsheets.
Excel Financials.
EXAMPLE 20

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What are the payments on a $4,000,000 loan over 20 years at 0.75% interest per month?
(with deferred payments)?
This example is illustrated in Figure 1-4.

Figure 1-4: Calculating a loan payment

Required function: PMT (rate; nper; pv; fv; type)
The following formula returns $35,989.04:
=PMT(0.75%;240;4000000;0;0)
This result can be verified using the VP function to calculate the borrowed amount. The formula
the following returns $200,000:
=VP(0.75%;240;-35989.04;0;0)
In this example, the loan is fully repaid after 20 years, and the argument vf is zero.
Also note that the payments will be monthly, and the monthly loan rate has been quoted. Therefore, the term
20 years is converted to months.
EXAMPLE 21
I can afford payments of $2,500 per month, and I can borrow at 0.45% (per month) for
20 years. How much can I afford to borrow on a completely redeemable mortgage?
Required function: PV(rate; nper; payment; fv; type)
This formula returns $366,433.74:
=VP(0,45%;240;-2500;0;0)

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Note that, with mortgages, we always assume that payments are made in arrears and that the typical argument...
be 0. Note also that the interest rate (and the payments) are monthly. Therefore, the term of 20 years must
to be converted to months.
You can check the answer using the calculated response to determine the rate on a mortgage of
$366,433.74 for 240 months. The following formula returns 0.45%:
=RATE(240,-2500,366433.74,0,0)
EXAMPLE 22
I currently owe $150,000 on a mortgage, and I make payments of $1,900 per month. The interest rate
the rate is 0.45% per month. How long will it take to repay the loan?
Required function: NPER(rate;payment;present_value;future_value;type)
The following formula returns 97.76:
=NPER(0,45%;-1900;150000;0;0)
Due to interest and payments being monthly, the formula returns an amortization period in months. This
The answer, although correct in mathematical terms, has a practical implication. Payments are really
made exactly on the monthly anniversaries. This calculation implies that the loan somehow remains
refunded at 0.76 of the 98th month's path. In reality, you have a choice: make a payment
additional at the end of 97 months, or make a reduced level payment after 98 months. These options
can be calculated using the VF function.
To calculate the additional payment at the end of the 97 months, calculate the amount owed using this formula (a
which returns –$1,429.85:
=VF(0.45%;97;-1900;150000;0)
Therefore, the final payment after 97 months is –$3,329.85 (that is, the regular payment of –$1,900 plus –
$1,429.85.
To calculate the reduced payment after 98 months, use this formula (which returns +$463.72):
=VF(0.45%; 98; -1900; 150000; 0)
Therefore, the final payment after 98 months is -$1,436.28 (that is, the normal payment of -$1,900 plus
$463.72.

A relatively common problem arises when the payment is less than the amount.
of the interest portion of the outstanding balance. In this example, the outstanding loan is $150,000, and the
interest for the first month is $675 ($150,000 * 0.45%). If the payment is less than this amount,
the debt balance will continue to increase, and the loan will extend infinitely (or rather,
you seem to survive until infinity). If this happens, the NPER function returns the error message
#NUM!
EXAMPLE 23
A consumer credit contract states that I borrow $1,000 and pay $100 per month.
advanced by 12 months. What is the interest rate?
Required function: RATE(nper; payment; present_value; future_value; type; estimate)
The following formula returns 3.503153%:
=TAXA(12;-100;1000;0;1)
Before you start thinking how generous this contract is, keep in mind that the payments are monthly.
Therefore, the result is the effective monthly rate!

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The equivalent annual effective rate is 51.16%, calculated as follows:
=(1+0.03503153)^12-1
The annual rate, based on nominal compounding with a monthly basis, returns 42.05%, calculated as follows:
=3,503153 * 12

There is a big difference between the effective annual rate and the equivalent nominal compounded rate.
monthly. The size of the difference increases with the levels of the rates used.
EXAMPLE 24
I borrowed $300,000 from a balloon mortgage for 15 years, with monthly payments of $100,000.
The balance of $200,000 is due at the end of the term. The interest rate is 0.4% per month, and payments are made
monthly and deferred. What will the payments be?
A common type of mortgage (used to increase the amount I can borrow) is the following
balloon mortgage. The loan is divided into two elements: 1) the "payment" element, where
Payments completely fulfill part of the loan at the end of the term, and 2) the 'balloon' element.
During the term of the loan, only the interest (and not the principal) is paid in the balloon element. The balance
Principal is paid as a lump sum at the end of the loan.
The ability to use a vf argument in the VP, PGTO, TAXA, and NPER functions becomes relatively
easy to carry out in balloon mortgage calculations.
Required function: PMT(rate; nper; pv; fv; type)
The following formula returns -$1,580.41:
=PMT(0.04, 180, 300000, -200000, 0)
Note that the total mortgage of $300,000 is used for the vp argument.
This calculation can be verified using the calculated payment to determine the PV. This formula returns
$299,999.43 (the rounding error was caused by the use of a rounded payment amount):
=VP(0,4%;180;-1580,41;-200000;0)
Balloon payments can be compared to payments on a traditional mortgage.
formula returns $202,509.64 (traditional mortgage):
="VP(0,4%;180;-1580,41;0;0)"
Payments for the traditional mortgage of $300,000 are -$2,341.24, calculated with this formula:
=PMT(0.04, 180, 300000, 0, 0)
The previous examples of amortization calculations can be modified for balloon mortgages.
Providing a vf argument in the functions VP, PGTO, NPER, and TAXA.
You can also calculate the balloon mortgage element on your own with the FV function.
This is a calculation that requires careful interpretation of the sign of the result. If the VF function returns a
positive value, which means that the original mortgage has been overpaid and this amount is now owed to the borrower
of the loan. If it returns a negative amount, this is the amount of the balloon element. An element
balloon will exist in cases where the payment amounts do not completely pay off the loan during
the term of the mortgage at the quoted interest rate.

Typically, these calculations are done in two stages. First, calculate the payment on the amortization.
normal loan (usually according to the lender's rules). Secondly, calculate how much the element
An additional payment will allow for a 'balloon'. Example 25 provides the details.

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EXAMPLE 25
If the bank insists on a amortization of $200,000 of a loan, how much extra can I take?
borrowed on a balloon mortgage if I can afford payments of $3,000 per month? The term
the loan is for 10 years, and the current interest rate is 0.4% per month.

Required function: PMT(rate;nper;pv;fv; type)

O primeiro passo é calcular o pagamento para uma amortização normal do empréstimo de $200.000. A
the following formula returns –$2,101.81:
=PMT(0.04; 120; 200000; 0; 0)
If the payments of $3,000 are affordable, the additional amount of $898.19 can be paid as
interest on the balloon element (that is, $3,000 - $2,101.81). The balloon element can now be calculated
because the amount of interest is known. This formula, which represents the balloon element, returns
$224,546.88
898.19 / 0.4%
The calculation can be verified by calculating the payment based on a total mortgage of $424,546.88 with a
balloon element of $224,546.88. The following formula returns –$3,000:
=PMT(0.04;120;424546.88;-224546.88;0)

Converting Interest Rate

The previous examples were conveniently expressed to allow for easy adjustment of the rates.
interest with the frequency of payments and the total term. Frequently, however, interpreting a problem
Financing will be more difficult. There are two situations in which the conversion of interest rates must be done:
When you need to do calculations involving the frequency of payments or the number of periods, and the
The rate you require for use does not match the payment frequency or period.
When you have made calculations involving the frequency of payments or the number of periods, and you
it is necessary to express the resulting interest rate in terms of a rate per year or some other period of
tempo.
To create accurate formulas, you will need to understand the principle of equivalence of interest rates.
Put simply, any interest rate over a period of time is equivalent to another rate of
interest for a different period of time.

Methods of Quoting at Interest Rate

There are three methods commonly used for quoting interest rates:
Nominal Rate: The interest is quoted on an annual basis, along with a frequency of compounding per year.
example, the quoted APR of, let's say, 6% compounded monthly, where 0.5% is due per month.

Effective annual rate: The interest rate at which the given rate represents the percentage earned in a year.
For example, with an annual effective rate of 10%, $1,000 yields $100 in interest at the end of one year.
Effective periodic rate: The interest rate at which the given rate represents the percentage earned during a
a period of less than a year. For example, with a rate of 3% per semester, $300 yields $9 after six
months.

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An interest rate quoted using any of these three methods can be converted to any other.
through the three methods. For example, consider an interest rate of 1% per month on $100. In the first month,
The investment earns $1 in interest. If the credited interest is not withdrawn, it will be added to the principal, and the
The following interest will be based on the new balance. A monthly interest rate of 1% is equivalent to 12.6825%.
per year interest rate (the effective rate). This is calculated using the following formula:
(1 + 0.01)^12 - 1
Another example of a Nominal Rate is an interest rate quoted as 6% per year, compounded.
quarterly. This means that 1.5% (i.e., 6% / 4) is paid or received every three months.
Most banks and financial institutions quote interest rates based on nominal monthly compounding.
Meanwhile, when reporting the return on investments or when comparing interest rates, it is common
to quote the effective annual return, which makes it easier to compare rates. For example, we know that 12%
annual interest compounded monthly is more than 12% per year compounded quarterly — but we do not know
(without an intermediate conversion calculation) how much more it is.

Converting Interest Rates Using the Financial Functions Add-in

As you will see, 10 different conversions may be required in the conversion between the Nominal systems.
Annual Effective and Periodic Effective.

The Financial Functions spreadsheets in Excel that are attached contain a supplement.
(called Financial Functions), written by Norman Harker. This supplement provides the functions
customized (written in VBA) to calculate interest rate conversions. You will find
also a folder that demonstrates the use of these functions. In addition, these functions are used
in many of the examples in this and the subsequent chapters. For your convenience, the
VBA functions are defined in the example folder. Therefore, you do not need to install the add-in.
to work with the example folders.

When using the Financial Functions supplement, you can either enter the function manually, or
use the Insert Function dialog box in Excel (the functions are located in the Financial category).
The name of the function and the arguments may seem confusing at first glance, but you will soon understand them.
the name of each function is composed of three parts:
The interest rate you have (Effx, AnnEff, or Nomx). Note that the compounding frequency of the Effective Rate
The nominal are denoted by x.
The linking symbol, which is an underscore character (_).
The interest rate you want (Effx, Effy, AnnEff, Nomx, or Nomy). Again, the frequencies of
composition is denoted by x (if it is the same as the frequency of the rate you have), or y (if it is...
different).
The order of the arguments is also easy to control:
The first argument is always the interest rate you have.
The second argument is always Freqx, which is the frequency of the Effx or Nomx rate. Note that each function
the conversion uses a Freqx argument, and it is always the second argument.
If there is a second known frequency different from dex or annual, there is a third argument, Freqy.

Effective Cost of Loans

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Lending institutions typically publish in their 'headlines' the rates to make them appear so
lower as much as possible. An experienced borrower is able to interpret these rates for
determine how much the loan is really costing. The only safe and constant comparison is to observe
the effective cost in terms of effective annual interest rates, or some other common rate such as the rate
nominal annual compounded monthly.
This section presents four examples that demonstrate how to calculate the effective cost of loans.

All the examples in this section are available in the Functions Folder Sheets.
Excel Financials. These examples use the interest rate conversion functions.
VBA customizations.

Impact of Fees and Charges on the Effective Interest

In addition, for those interested in a mortgage, banks often charge 'points' or setup fees.
fees, and account service charges. These fees add to the effective cost of the loan. But by
how much?
EXAMPLE 26
A bank quotes a mortgage at a nominal rate of 3% compounded monthly, and you are interested in taking out
a loan of R$300,000 for 20 years with monthly payments. The bank charges in advance to
loan agreement a fee of 1% of the loan, plus a service charge of $15 per month.
What is the effective annual cost of the loan?
Figure 1-5 shows a spreadsheet that is set up to solve this problem. The known information is
Entry in the Database section of the spreadsheet. Table 1-2 lists the central formulas that perform the calculations.
For clarity, the formulas are shown using actual values instead of cell references.

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Cell B19 uses the function EFFECTIVE(Nominal/12;12).

Payments are based on the loan amount of $150,000, but the effective cost is based on the
the fact that, after deducting the set-up fee, the borrower only receives $147,000. Similarly,
actual payments are higher due to the account service fee amount.
The impact of these costs varies according to the deadline: The shorter the deadline, the greater the impact. If a
mortgage cannot be transferred to a new house when the borrower moves,
The calculation should be based on the likely time the mortgage will end — usually around seven years.

Flat Rate Loans

Many consumer credit contracts use a loan agreement in which a percentage of
the loan is added to the loan, and the payments are based on the total amount borrowed
but the interest rate divided by the number of payments. We can use the EFFECTIVE and RATE functions in Excel
to calculate the actual costs of such a loan.
EXAMPLE 27
A consumer finances the purchase of their car with a flat loan rate of $15,000 over 18 months.
months. Interest of 10% * 1.5 this amount is added to the loan and he pays 1/18 of this amount each month
advanced by 18 months. What is the effective cost of the loan?
The easiest way to solve this function is to use the EFFECTIVE function. The following formula returns 3.62%:

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EFFECTIVE(RATE(18; -17250/18; 15000; 0; 1); 12)
Note that if the term of such a loan is only 12 months, the rate is slightly more than double that of
taxaflat. Many states and nations have legislation for such loan contracts to have the Annual Rate
Nominal interest rate compounded monthly clearly established in the loan agreement.

Interest-Free Loans
Another interesting calculation is the effective cost of a so-called 'interest-free' loan offer.
Doing these calculations, you need to know the price at which you will be able to get the product elsewhere.
(without the interest-free package).
EXAMPLE 28
Um consumidor compra um sistema hi-fi ao preço de tabela por $3.000 em termos de “livre de juros”
for 12 months, with the payments made in advance. He could have bought an identical system for
$2,500 upfront or in normal credit terms. What is the effective cost of this loan?
Again, the Effx_AnnEff VBA function provides the simplest solution. This formula returns 51.16%:
=Effx_AnnEff(TAXA(12;-(3000/12);2500;0;1);12)
Such calculations are often more difficult when the equivalent cash price is subjective (for example,
the used vehicle market.
You can make similar calculations for other types of contracts, such as 'Pay 25% today, do not pay'
but for 12 months." Again, the secret is to get the equivalent price in advance, and then compare the
calculations with that price, rather than a price that is inflated by the retailer offering it.
credit.
Many states and nations have consumer credit legislation that governs the quoting of interest rates.
Em muitos locais, o únicio regulamento de contratos do tipo livre de juros é que o varejista não pode
offer the same product at a different cash price than that quoted in the contract free of interest.

Loan Costs of 'Annual Payments / 12'

A practice that is rooted in the days before calculators is calculating payments on an 'annual' basis.
delayed", and I will charge the borrower of the loan 1/12 of that amount each month. This calculation was
facilitated by the pre-prepared tables of monthly payments for a $1,000 loan. Practice prevails
especially in the UK Building Societies partly because it produces a higher publishing rate
lowering the Nominal or Effective Rate regimes.
EXAMPLE 29
A bank offers a mortgage of $100,000 at a rate of 7% for 10 years, where the monthly payments are
are based on 1/12 of the annual payment calculated to be paid monthly and in arrears. Which
What is the annual effective cost?

The following formula (which uses the Effx_AnnEff VBA function) returns 0.7522% (the effective annual rate):
=Effx_AnnEff(TAXA(10*12;PGTO(7%;10;100000;0;0)/12;100000;0;0);12)

Calculating the Components of Interest and Principal

This section discusses four Excel functions that enable you to:
Calculate the components of interest or principal of a particular payment (the IPGTO and PPGTO functions)

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Calculate the accumulated components of interest or principal between any two periods.

The examples in this section are available in the Spreadsheets of the Financial Functions Folder.
Excel.

Using the IPGTO and PPGTO Functions

You may want to know (or simply be curious about) how much a private payment is.
it constitutes the interest, and how much of the payment goes to the principal.

This information may be useful in determining the effects of taxes on interest payments. If
if you studied any of the loan amortization examples, you know that the interest element does not
is constant throughout the life of a loan. In contrast, the interest component decreases, while the
main component grows.

If you created an amortization spreadsheet, these functions are not particularly useful,
because you can simply refer to the spreadsheet. The IPGTO and PGTO functions are more useful
when you need to determine the breakdown of interest/principal of a particular payment.
The syntax for these two functions is as follows (arguments in bold are required):
IPGTO(rate,per,number of periods,present value,future value,type)
PPGTO(taxa,per,nper,vp,vf,tipo)
As with all functions, the rate, per, and nper must match in terms of the period. If the term of
loan measured in months, the argument rate must be the effective rate per month, and the argument (that is, the
The interest period must be a particular month.
EXAMPLE 30
A consumer obtained a car loan for three years (monthly payments) for $20,000 at a
taxa anual de 8%. Quais são as porções de juros e principal para o pagamento final do empréstimo?
Figure 11-6 shows the solution, set up in a spreadsheet.

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 Bertolo Introduction to Excel Financial Functions

Figure 1-6: This spreadsheet calculates the interest and principal components for any periods.
of a loan.
Required function: IPGTO(rate;per;nper;pv;fv;type)
This formula calculates the portion of interest of the final payment, and returns -$4.15:

=IPGTO(8%/12;36;36;20000;0;0)
The following formula calculates the portion of the principal of the final payment, and returns –$622.58:

=PPGTO(8%/12;36;36;20000;0;0)
At the end of the loan term, almost all payments go towards the principal.
To compare this with the first loan period, I change the argument to 1.
After doing this, the formulas return –$133.33 (interest) and –$493.39 (principal).

You can check the calculations using the PMT function (which returns the total payment,
interest plus principal). The following formula returns –$626.73, which is the amount of payment of
loan (and the sum of the two previous formulas):
=PMT(8%/12, 36, -20000, 0)

Using the FUNCTIONS PAYMENTINTERESTWITH and PAYMENTCAPITALWITH

The IPGTO and PPGTO functions can be useful. But, very often, you will need to know the
components interest or principal for a group of consecutive periods. In this case, the functions
PGTOJURACUMePGTOCAPACUM are of great service. These functions are useful for creating

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annualized amortization spreadsheets, and to construct qualified interest for return purposes
income tax.
The syntax for these functions is shown here (all arguments are required):
PGTOJURACUM(rate;number_of_periods;present_value; start_period; end_period; payment_type)
PGTOCAPACUM(rate; number_of_periods; present_value; start_period; end_period; payment_type)

These functions are available only when the Analysis ToolPak add-in is enabled.
is installed.
EXAMPLE 31
A consumer is borrowing $250,000 on a mortgage, to be repaid over 10 years at 5.6%
nominal, compounded monthly, with monthly payments in arrears. What will the payments be of
interest and principal in the first year of the loan?
The following formula, for principal payments, returns $19,183.06:
CAPACITY PAYMENT (EFFECTIVE(0.056/12;12);10*12;250000;1;12;0)
The following formula returns $13,541.55 (total payment of interest):
= PGTOJURACUM (EFETIVA(0.056/12;12);10*12;250000;1;12;0)
We can verify these answers using the PMT function to calculate the total of the payments. The
the following formula returns $32,724.61, which is the sum of the previous results:
=PAYMENT(EFFECTIVE(0.056/12;12);10*12;250000;0;0)*12

These formulas all use the custom VBA function Nomx_Effx.

Reconciling Interest and Payment Frequencies

Different
The previous examples involved nominal interest with compounding frequencies that adapt to the
payment frequencies. Thus, for example, we could have a nominal rate compounded monthly
quoted with payments that are also monthly. As usual, the real world is not always cooperative.
EXAMPLE 32
A bank quotes the nominal interest rate compounded monthly at 6.3%, but allows weekly payments at the rate.
of equivalent interest. If I borrow $300,000 for 10 years, what would the payments be?
weekly?
The easy way to solve such problems is to use the custom interest conversion function Nomx_Effy.
This formula returns $777.51:
=PMT(Nomx_Effy(6.3%;12.52);10*52;300000;0;0)
EXAMPLE 33
We have set up an annual account, but it needs to handle a monthly output of $12,500. Instead of
Annualize by multiplying by 12, what is the equivalent annual amount using a deposit of 7% per year.
nominal compounded monthly? The monthly payment is deferred, and the equivalent amount is to be
calculated at the end of each year.

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 Bertolo Introduction to Excel Financial Functions
First, calculate the effective monthly rate (using a custom VBA function). The following formula
returns 0.58333%
=Nomx_Effx(7%;12)
So, calculate the equivalent annual amount using the FV function. This formula returns -$154,907.29:
=VF(0.58333%;12;-12500;0;0)

In this example, the signals can be confused. We would normally treat the output as
a negative future value and the return as positive. However, if we are using the result
as an output, then the signals are reversed. This can be done either using -12.500, as the
output, or reversing the sign of the result using – VF (as in the example).
If the equivalent amount is calculated in advance, we would use the same principles and apply it
VP function.

Limitations of Excel Financial Functions

The main financial functions of Excel (PV, FV, PMT, RATE, NPER, PMTINTERESTWITH and
PGTOCAPACUM) are very useful, but they have two common limitations:
They can only manipulate one level of interest rate.
They can manipulate only one level of payment.
For example, the NPER function cannot handle the variations in payments that arise with calculations of
credit card. In such calculations, the monthly payment is based on a reduction of the outstanding balance, and can
also subject to a minimum amount rule.
The common solution for the variable payment problem is to create a cash flow spreadsheet and use
other financial functions that can manipulate multiple payments and fees. Process examples
They appear in the next two chapters. Briefly, the functions involved are:
_VFPLANO, which deals with the capitalization of a Present Value at different rates and that, when used
In a formula, you can calculate the present value of a future amount at different rates.
TIR, which deals with the calculation of a single rate of regular cash flows.
VPL, calculation of the sum of present values of regular cash flows and which can be calculated by the formula
manipulate the sum of accumulated values of regular cash flows.
_MTIR, which is a specialist TIR aimed at preventing multiple TIR issues by applying different
taxes on regular negative and positive cash flows.
XTIR, which deals with the calculation of a single rate of irregular cash flows.
_XVPL, which deals with the calculation of the sum of the present values of irregular cash flows and that, in a
formula, can address the sum of accumulated values of irregular cash flows.
In a situation that involves only one or two variations, it may be possible to avoid the construction of flow.
of the box using nested formulas in it, or applied to the basic amortization formulas.

Deferred Start for a Series of Regular Payments

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In some cases, a series of cash flows may have a deferred start. We can calculate the PV of a
regular series of cash flows with a deferred start using a formula like this:
=VP(RATE;NPER;PMT;FV;Type)*(1+RATE)^-DEFER_PER
Here, DEFER_PER represents the number of periods for which the first cash flow is deferred.
EXAMPLE 34
I want to borrow money based on deferred payments. The grace period will be one
year. After that, the loan will be for 10 years with deferred monthly payments. The interest rate is
8% per year and effective. The loan is to acquire a property that I am building, and the
the bank is offering the loan, subject to payments not exceeding 75% of the estimated profit of
$9,500 a month. How much should I borrow?
The following formula uses the custom function AnNEff_Effx and returns $550,422.02:
=VP(AnnEff_Effx(8%,12,10*12,-9500*75%,0,0)*(1+AnnEff_Effx(8%,12))^-
12

Evaluating a Series of Regular Payments

We can extend the basic principle of discount, but different levels of payments chaining the
VP functions. For example, if PV1, PV2, and PV3 represent different present values of series of
payments for periods NPER1, NPER2, and NPER3, the amount discounted from all payment series
can be found by:
PV1 + PV2(1+I)^-NPER1 + PV2(1+I)^-(NPER1+NPER2)
EXAMPLE 35
What is the present value of a property yielding $5,000 per month for four years, increasing to
$6,500 per month for the next three years, increasing to $8,500 per month in the final three years? After 10
In years, the property will have an estimated value of $1,300,000. A discount rate of 10% per year can be
assumed and all payments are made in advance.
The following formula returns -$978,224.54:
=VP(AnnEff_Effx(10%,12),48,5000,0,1) +
VP(AnnEff_Effx(10%,12),36,6500,0,1)*(1+AnnEff_Effx(10%,12))^-48 +
VP(AnnEff_Effx(10%,12),36,8500,1300000,1)*(1+AnnEff_Effx(10%,12))^-(48+36)

Note how the final amount of $1,300,000 was nested in the final PV function.
The same answer could be obtained by the 'nesting' of successive Present Values within the function.
preceding as future values. But remember that as the present value at that moment represents a right to
series of future profits, the signal would have to be reversed. The following formula returns $978,224.54:
=VP(AnnEff_Effx(10%,12),48,5000,-
VP(AnnEff_Effx(10%,12),36,6500,-
VP(AnnEff_Effx(10%,12),36,8500,1300000,1),1),1)
Of these two approaches, the first formula (using the basic discount formulas) seems easier.
as a method; it seems easier to build using the megafórmula technique or to break down into
three cells that are added together.

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 Bertolo Introduction to Excel Financial Functions
The following formula returns $200,344.00:
=VP(AnnEff_Effx(10%,12),48,5000,0,1)
This formula returns $139,559.07:
=VP(AnnEff_Effx(10%,12),36,6500,0,1)*(1+AnnEff_Effx(10%,12))^-48
This formula returns $638,331.47:
=VP(AnnEff_Effx(10%,12),36,8500,1300000,1)*(1+AnnEff_Effx(10%,12))^-
(48+36)
And the total of the three elements checks is $978,224.54.
Subject to exceptions involving only one or two variations in the payment series, the solution will be
create a cash flow spreadsheet. This will be covered after the next chapter because we will have to
first describe the basic tools NPV and IRR.

Summary
This chapter introduced financial functions and provided the basic concepts of the value of money.
time and equivalent interest rates. The chapter presented a series of examples that used the functions
main financials for capitalization, discount, and loan amortization.
O próximo capítulo apresenta exemplos que usam o Excel para cálculos de depreciação, e introduz as
techniques for calculating net present value (NPV) and internal rates of return (IRR).

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