Financial Functions

 

Pmt    |   Rate    |   Nper    |   Pv    |   Fv

To illustrate Excel's most popular financial functions, we consider a loan with monthly payments, an annual interest rate of 6%, a 20-year duration, a present value of $150,000 (amount borrowed) and a future value of 0 (that's what you hope to achieve when you pay off a loan).

We make monthly payments, so we use 6%/12 = 0.5% for Rate and 20*12 = 240 for Nper (total number of periods). If we make annual payments on the same loan, we use 6% for Rate and 20 for Nper.

Pmt

Select cell A2 and insert the PMT function.

Insert Excel's Most Popular Financial Function

Note: The last two arguments are optional. For loans the Fv can be omitted (the future value of a loan equals 0, however, it's included here for clarification). If Type is omitted, it is assumed that payments are due at the end of the period.

Result. The monthly payment equals $1,074.65.

Pmt Function

Tip: when working with financial functions in Excel, always ask yourself the question, am I making a payment (negative) or am I receiving money (positive)? We pay off a loan of $150,000 (positive, we received that amount) and we make monthly payments of $1,074.65 (negative, we pay).

Rate

If Rate is the only unknown variable, we can use the RATE function to calculate the interest rate.

Rate Function

Nper

Or the NPER function. If we make monthly payments of $1,074.65 on a 20-year loan, with an annual interest rate of 6%, it takes 240 months to pay off this loan.

Nper Function

We already knew this, but we can change the monthly payment now to see how this affects the total number of periods.

Nper Function

Conclusion: if we make monthly payments of $2,074.65, it takes less than 90 months to pay off this loan.

Pv

Or the PV (Present Value) function. If we make monthly payments of $1,074.65 on a 20-year loan, with an annual interest rate of 6%, how much can we borrow? You already know the answer.

Pv Function

Fv

And we finish this chapter with the FV (Future Value) function. If we make monthly payments of $1,074.65 on a 20-year loan, with an annual interest rate of 6%, do we pay off this loan? Yes.

Fv Function

But, if we make monthly payments of only $1,000.00, we still have debt after 20 years.

Fv Function

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