Download TIME VALUE OF MONEY

TIME VALUE OF MONEY
Spreadsheet Skills for Finance
Instructor: Pamela Peterson Drake
Function
Parameters
Financial math
FV
=FV(RATE,NPER,PMT,PV,type)
FV=$100(1+0.06)
Microsoft Excel function
5
=FV(.06,5,0,-100)
5
$4(1 + 0.06)t + $100(1 + 0.06)5
FV =
=FV(.06,5,4,-100)
t=1
PV
=PV(RATE,NPER,PMT,FV,type)
PV=
$1,000
8
$50
$1,000
+
t
(1 + 0.04)
(1 + 0.04)8
PV =
t=1
RATE
=RATE(NPER,PMT,PV,FV,type,guess)
=PV(.04,8,0,1000)
(1+0.04)8
$350=
$500
=PV(0.04,8,50,1000)
=RATE(7,0,-350,500)
(1+i)7
7
$350 =
t=1
5
$6
$500
+
t
(1 + i)
(1 + i)7
CF
PMT
=PMT(RATE,NPER,PV,FV,type)
$1,000= 
NPER
=NPER(RATE,PMT,PV,FV,type)
$2,000=$1,000 (1+0.06)
=RATE(7,6,-350,500)
=PMT(.03,5,-1000,0)
t
t=1 (1+0.03)
n
=NPER(.06,0,-1000,2000)
5
$2,000 =
$10(1 + 0.06)t + $1,000(1 + 0.06)n
=NPER(.06,10,-1000,2000)
4
=EFFECT(.05,4)
t=1
EFFECT
NOMINAL
=EFFECT(nominal_rate,npery)
=NOMINAL(effect_rate,npery)
EAR=(1+
0.05
12
APR =
/4) - 1
0.06+1 −1
12
=NOMINAL(.06,12)
Notes about the financial functions
1. Interest rates are stated in decimal form when used as a parameter in a time value of money function.
2. When both PV and FV are present as parameters, the PV must be stated as a negative value.
3. "type" refers to whether payments are beginning or end of period cash flows: 0 for end, 1 for beginning (annuity due). If this parameter is left
off, 0 is assumed.
4. "guess" is only necessary for problems that are not "well-behaved"; that is, when the set of cash flows are so complex that is takes an unusually
long time for the function to converge in trial and error. In most financial problems, the guess is not necessary.
5. If the problem is a simple lump-sum problem, PMT is zero. If the problem is a lump-sum problem, you must place a zero in the parameter
position for PMT.
6. The PV function returns a negative value.
7. "npery" in the EFFECT and NOMINAL functions is the number of compounding periods in a year. The "nominal_rate" is the annual percentage
rate (APR), and the "effect_rate" is the effective annual rate (EAR).
The FVSCHEDULE function
The FVSCHEDULE function is useful when determining the future value of a lump-sum with changing interest rate -- or the value of a stock with different
returns each year: =FVSCHEDULE(principal,schedule_of_interest_rates). Consider an investment that has the following returns:
1
2
3
4
5


A
Year
2010
2011
2012
2013
B
Return
5%
6%
3%
-5%
The value of $1 invested at the end of year 2009 would produce a value of $1.08907 at the end of 2013 [=FVSCHEDULE(1,B2:B5) ]
The value of $1,000 invested at the end of year 2009 would produce a value of $1,089.07 at the end of 2013: [FVSCHEDULE(1000,B2:B5)]