It Final Problem

FINAL PROBLEM – FINANCIAL FUNCTIONS

[1] PMT

In my class not long ago, you have learnt to use the PMT function. The problem at that time was:

“You would like to borrow a bank VND 2 billion to buy an apartment. You plan to pay off the loan in 12 years, paying a fixed amount of money at the end of each month. The interest rate is 21% a year. Calculate the money you have to pay each month.”

We have solved that problem by 3 methods (1) purely mathematics (one of you has come up and solved the problem beautifully, that guy will get extra credit), (2) Using excel to generate the amount of money you own the bank at the end of each month for the 10 years (120 months) period, changing the amount you pay each month to converge the loan at the end of 10 years to zero, and (3) using the PMT function of excel which is

PMT(21%/12, 10*12, 2.000.000.000) = -VND 39.986.335

Now using the same PMT function, please solve this problem.

“You’ve just had a child and would like to send him to Germany for college when he turns 18. The cost for his education is estimated at €100.000. You plan to send to the bank a fixed amount of money every month to save for this plan. The interest rate is 7% per year. Calculate that amount. What if you would like to pay the bank quarterly (every 3 months)?”.

[2] iPMT

Now have a look at this page (http://office.microsoft.com/en-us/excel-help/ipmt-function-HP010062364.aspx). The iPMT function will give you the interest payment for a given period based on periodic, constant payment with a constant interest rate. Look down to the examples at the end of the page. Your assignment is

“In a short paragraph (<10 sentences), explain how the iPMT works, what is the difference in results in line 7 and 8”

The IPMT function is used to calculate the amount paid as interest on a loan during a period of the lifetime of a loan or an investment.