Table of Contents
Financial Functions
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 $150000 (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.
Note: the last two arguments are optional. For loans 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 $1074.65.
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 $150000 (positive we received that amount) and we make monthly payments of $1074.65 (negative we pay). Visit our page about the PMT function for many more examples.
RATE
If Rate is the only unknown variable we can use the RATE function to calculate the interest rate.
NPER
Or the NPER function. If we make monthly payments of $1074.65 on a 20-year loan with an annual interest rate of 6% it takes 240 months to pay off this loan.
We already knew this but we can change the monthly payment now to see how this affects the total number of periods.
Conclusion: if we make monthly payments of $2074.65 it takes less than 90 months to pay off this loan.
PV
Or the PV (Present Value) function. If we make monthly payments of $1074.65 on a 20-year loan with an annual interest rate of 6% how much can we borrow? You already know the answer.
FV
And we finish this chapter with the FV (Future Value) function. If we make monthly payments of $1074.65 on a 20-year loan with an annual interest rate of 6% do we pay off this loan? Yes.
But if we make monthly payments of only $1000.00 we still have debt after 20 years.