Time value of money and financial calculator tutorials
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Time value of money and financial calculator tutorials
Random numbers drawn from a particular probability distribution (i.e., random variates) are frequently needed in many fields, particularly for simulations. There are many algorithms for generating random variates, but I will focus on one simple technique that can be used with some built-in Excel functions. This technique is known as the Inverse Transform Method. For our purposes, we want to…
In the original amortization schedule tutorial I left out a feature that is of interest to a lot of people: adding extra principal payments in order to pay off the loan earlier than the loan contract calls for. In this tutorial we will add this feature. Before we get started let me mention one important thing: You can almost always…
Typically, in finance textbooks, bond valuation is discussed with a hidden assumption: that you are valuing the bond on a coupon payment date. If that is the case, then you can use the PV function to find the price (though there is another hidden assumption in there: that the yield curve is flat). The problem with this is that usually…
This is the first of a two-part tutorial on amortization schedules. In this tutorial we will see how to create an amortization schedule for a fixed-rate loan using Microsoft Excel and other spreadsheets (the next part shows how to handle extra principal payments and also includes a sample spreadsheet using this same example data). Almost all of this tutorial also…
Virtually every finance textbook has at the back, a series of tables that contain multipliers that can be used to easily calculate present or future values without the need for a financial calculator. In recent years these tables have given way to financial calculators, but they are still used by some professors and on some professional exams. This tutorial will…
Duration and convexity are important numbers in bond portfolio management, and duration is pretty simple in Excel because there are built-in functions. Convexity, though, is another matter. Of course, there are formulas that you can type in (see table below), but they aren’t easy for most people to remember and are tedious to enter. In this article I will show…
One of the key variables in choosing any investment is the expected rate of return. We try to find assets that have the best combination of risk and return. In this section we will see how to calculate the rate of return on a bond investment. If you are comfortable using the built-in time value functions, then this will be…
Strictly speaking, an annuity is a series of equal cash flows, equally spaced in time. However, a graduated annuity is one in which the cash flows are not all the same, instead they are growing at a constant rate. So, the two types of cash flows differ only in the growth rate of the cash flows. Annuity cash flows grow…
In recent years, bond issuers have changed from the traditional call schedule to a “make-whole” type of call. Generally, this is good for investors as it makes it less likely that high interest bonds will be called. If it is called, then they are “made whole” because they are paid the present value of the remaining cash flows. In a…
A bond is a debt instrument, usually tradable, that represents a debt owed by the issuer to the owner of the bond. Most commonly, bonds are promises to pay a fixed rate of interest for a number of years, and then to repay the principal on the maturity date. In the U.S. bonds typically pay interest every six months (semi-annually),…