In all the below Time Value of Money concepts, we have seen only how to calculate the initial and final amounts when rate and period is given.
Now we can see other problems where the initial and final amounts are fixed and other two parameters – periods and rate – can be modified or calculated.
Sometimes even Equated Payments are also calculated.
EXAMPLE 1 – TO CALCULATE THE INTEREST RATE
Suppose you have $1000 today and you want $9000 in 15 years from now. You have to look for a banking scheme which will give this interest rate. Now let us solve this problem using MS Excel (R) RATE Function.
EXAMPLE 2 – TO CALCULATE THE PERIOD
Suppose you have $500 today and you want $7000. However your bank can give an interest of maximum 12% per annum. In how many years (periods) your money will be $7000 at that interest rate. Now let is solve this problem using MS Excel (R) NPER Function.
EXAMPLE 3 – TO CALCULATE INTEREST RATE FOR ANNUAL PAYMENTS
Suppose you want to spend $15000 on your son / daughter college education after 18 years from now. Your capacity is to invest $500 every year. You have to look out for a bank that gives this scheme of interest. Now let us solve this problem using MS Excel (R) RATE Function.
EXAMPLE 4 – TO CALCULATE THE PERIODS FOR ANNUAL PAYMENTS
Suppose your bank is giving an interest rate of 9% per annum. You decide to invest $250 every year. You want to use $8000 for your son / daughter marriage after some years. In how many years from now you can arrange the marriage? Now let us solve this problem using MS Excel (R) NPER Function.
EXAMPLE 5 – TO CALCULATE EMI ON YOUR VEHICLE / HOME LOAN
EMI means Equated Monthly Installment. It is the fixed amount payed by a borrower to a lender at a specified date each calendar month. Equated monthly installments are used to pay off both interest and principal each month, so that over a specified number of years, the loan is paid off in full.
Suppose you have borrowed $7500 for your car at an interest rate of 6% for 5 years. What would be the EMI per month that you have to pay back the bank? Let us solve this problem using MS Excel (R) PMT Function.