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Calculating interest and principal components of loan repayments

From: Excel 2007: Financial Analysis

Video: Calculating interest and principal components of loan repayments

Calculating the amount of principal you've paid on a loan enables you to determine the amount of equity you have in a purchase. Your equity is your down payment, plus any loan principal you've paid, plus the asset's appreciation, if any, and also what your new monthly payment would be if you refinance the loan. Calculating the interest paid on the loan enables you to find the amount of interest you've paid in the fiscal year, which you can often write off in your tax return. You can determine the amount of interest included in a particular loan payment using the IPMT function.

Calculating interest and principal components of loan repayments

Calculating the amount of principal you've paid on a loan enables you to determine the amount of equity you have in a purchase. Your equity is your down payment, plus any loan principal you've paid, plus the asset's appreciation, if any, and also what your new monthly payment would be if you refinance the loan. Calculating the interest paid on the loan enables you to find the amount of interest you've paid in the fiscal year, which you can often write off in your tax return. You can determine the amount of interest included in a particular loan payment using the IPMT function.

IPMT simply stands for Interest Payment. Start the IPMT function and you have six arguments. The rate, the number of the period for which you are calculating the interest, the number of periods in the entire loan, the present value of the loan, which is simply the principal, the future value of the loan, which is any amount that will be unpaid or that you will have paid in excess at the end of the loan's term, and also the type. Type is either zero or omitted, in which case you make your payments in arrears or at the end of a period, or one, in which you make your payments at the beginning of a period.

In almost every case, you will be making your payments at the end of the period, so you would leave that argument blank. So, in this case, we have the interest payment, we have the rate in B5, and because we're going to be copying this formula down the column in the table, we want to leave that cell static or keep it as an absolute reference, then divide by 12, so we have the proper rate as divided by the number of months, and then we have the period.

The period for this payment is in A12 and we can leave this Cell Reference as a relative reference, so it does change when we copy the formula down the column. The number of periods is the loan's term, in this case 30 years, multiplied by 12, which is the number of months in a year. So we have B7, again, we don't want this Cell Reference to change, so we make it an absolute reference by pressing F4, multiplied by 12. The present value of the loan is the principal. That's in cell B3.

Again, F4 to make it an absolute reference. We're paying off the entire loan and we're making our payment at the end of the period, so we can leave the future value and Type arguments blank. Hit Return and there we have the amount of interest paid in each of these loan payments. You'll notice that the values are in red, which means they're negative values representing a cash flow from you, an expense, in other words. We can do something similar for principal, to calculate the principal paid in each loan payment.

For that, we use the PPMT formula, and that is Principal Payment. It has the same arguments as the IPMT function. It's the rate, which is in B5, again, F4 to keep it constant, divide by 12, the period in A12, the number of periods is B7, absolute reference so it doesn't change, times 12, and then the present value of the loan, which is in cell B3.

F4 to make it an absolute reference. Close it, and there you have the principal paid in each of these 12 loan payments. You can also determine the cumulative interest and principal you've paid on a loan by using the CUMIPMT and CUMPRINC functions. The CUMIPMT and CUMPRINC functions require you to enter the periods for which you want to calculate interest and principal paid. For example, in this case, if you borrow $500,000 at 4.5% and you want to determine how much interest and principal you will pay over the first year, you can create these formulas.

For interest, you will create the formula =CUMIPMT, have the rate in B5, divide it by 12, the number of periods is the loan's term in B7, times 12, the present value of the loan, which is in the cell B3. The start period, which because we're looking at the first year of the loan is one, the first payment, and then the end period, which is 12. Again, we can leave Type blank, because we're paying in arrears.

So, we enter a type of zero and hit Return and you'll see that we'll have paid cumulative interest in the first year of $22334.99. If you want to do the same thing to calculate the amount of principal you've paid, you enter the CUMPRINC function. You have a rate in cell B5, divided by 12 for the number of payments during a year, the number of periods, which is the term, B7, times 12, the principal of the loan or the present value, which is in cell B3, the start period, again that's 1, the end period of 12, and the type, which is zero.

Close the parenthesis and you'll see that you've paid just over $8,066 against principal. I'll format that value as an accounting value, so you can see it as a currency value. Calculating the amount of principal and interest you have or will pay off on your loans reflects both the equity you have in your purchases and the amount of money you can write off on your taxes. Be sure to watch your interest expenses closely.

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This video is part of

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Excel 2007: Financial Analysis

51 video lessons · 13779 viewers

Curt Frye
Author

 
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  1. 2m 6s
    1. Welcome
      1m 8s
    2. Using the exercise files
      32s
    3. Disclaimer
      26s
  2. 13m 20s
    1. Separating inputs and formulas
      2m 2s
    2. Avoiding common mistakes
      5m 39s
    3. Tracing formula precedents and dependents
      2m 52s
    4. Evaluating Excel formulas step by step
      2m 47s
  3. 18m 40s
    1. Tracking income and expenses using an Excel table
      3m 29s
    2. Creating a Pivot Table from table data
      3m 36s
    3. Pivoting a Pivot Table
      2m 22s
    4. Filtering a Pivot Table
      3m 11s
    5. Adding Pivot Table columns to enhance data analysis
      3m 5s
    6. Tracking cash flow using a Pivot Chart
      2m 57s
  4. 18m 48s
    1. Reading a corporate financial statement
      6m 1s
    2. Introducing common-sizing strategies for analyzing financial statements
      3m 59s
    3. Creating common-sized income statements
      3m 1s
    4. Creating common-sized balance sheets
      2m 53s
    5. Calculating percentage changes in financial statements
      2m 54s
  5. 8m 12s
    1. Calculating earnings per share
      1m 54s
    2. Calculating return on equity and return on assets
      2m 50s
    3. Calculating gross profit margin and net profit margin
      3m 28s
  6. 6m 19s
    1. Calculating the current ratio and quick ratio
      2m 47s
    2. Calculating the average collection period
      1m 56s
    3. Calculating inventory turnover
      1m 36s
  7. 6m 12s
    1. Calculating the equity ratio
      1m 26s
    2. Calculating the debt ratio
      2m 57s
    3. Calculating the times interest earned ratio
      1m 49s
  8. 10m 58s
    1. Calculating simple interest and compound interest
      3m 36s
    2. Applying nominal versus effective interest rates (APR versus APY)
      3m 21s
    3. Calculating the number of days between events
      4m 1s
  9. 13m 32s
    1. Computing the future value of an investment
      3m 30s
    2. Calculating present value
      2m 29s
    3. Calculating net present value
      2m 42s
    4. Calculating internal rate of return
      2m 24s
    5. Calculating NPV and IRR for uneven input periods (XNPV and XIRR)
      2m 27s
  10. 7m 30s
    1. Projecting future results using the Forecast function
      2m 9s
    2. Performing quick forecasts using the Fill handle
      2m 57s
    3. Adding a trendline to a chart
      2m 24s
  11. 22m 28s
    1. Introducing amortization
      2m 20s
    2. Calculating payments on a fully amortized loan
      2m 21s
    3. Calculating payments on a partially amortized loan (balloon payments)
      2m 4s
    4. Calculating interest and principal components of loan repayments
      5m 32s
    5. Introducing depreciation
      2m 1s
    6. Calculating straight line depreciation
      1m 30s
    7. Calculating declining balance depreciation
      3m 24s
    8. Calculating double declining balance depreciation
      3m 16s
  12. 9m 34s
    1. Introducing bonds and bond terminology
      1m 37s
    2. Calculating a bond's yield
      2m 15s
    3. Calculating the value of zero coupon bonds
      3m 18s
    4. Pricing bonds to be offered to investors
      2m 24s
  13. 23s
    1. Goodbye
      23s

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