Loan amortization

K. Raghunandan
 Loan amortization in Excel

• You borrow $1,000 now.

• Terms of loan are as follows: interest at 5% per year, 10
years.
• Assume you start paying at the end of year 1.
• How much is your payment per period?
• How much of the payment is for interest each period,
and how much is payment of the principal?
• Use Excel.
 Payment amount formula in excel

• Format is as follows.
• PMT is payment you make each period.
• Other variables are defined as before.
• rate = interest per period; nper = number of periods, pv =
amount you got (borrowed) now; fv = any future amount
you get; type = 0 if you pay at end of each period.
 Excel Example

• For our example it will be:

=PMT(5%,10,1000,0,0)
• Answer is ($129.50).
• It is within parentheses because it is negative cash flow,
i.e., you are making the payment.
• The amount you have pay each period to pay off the
loan is $129.50.
• Part of the payment each period is for interest on amount
owed, and rest is for payment of the principal.
• How much of your payment is for interest or principal
each period?
 Interest and Principal Payments

• Interest for any period is based on amount owed at the

start of that period.
• Interest = amount owed at start of period x interest rate
per period.
• In Period 1, you owe $1,000 at the start.
• So interest for period 1 = $1,000 x 5% = $50
• Total amount paid in each period = $129.50
• This total includes interest for period + some re-payment
of principal.
• So $129.50 – $50 = $79.50 is the amount towards
repayment of principal in period 1.
 Principal and Interest components of payment

• There is a short-cut in excel to calculate interest each

period.
• In excel formula, the format is:
=IPMT(rate,Payment #,nper,pv,[fv],type)
• Notice new item here – payment number.
• This is because interest will vary from period to period,
so we need to know what is the payment number.
• That is, is it your first or second or fifth or tenth payment?
 =IPMT function in excel

• For the first period payment, payment number is 1.

• So we put in as follows in excel:
=IPMT(5%,1,10,1000,0,0)
• If you set up a Table in excel, and payment period is in
column 1, and first period payment row starts in row 3,
then you can put “A3” because the value of cell A3 is 1.
• (So cell A4 will be period 2, cell A5 will be period 3, and
so on – see next slide for example.)
• This gives interest for first period, which is = $50.
• Hence, the balance ($129.50 - $50) of $79.50 is
repayment of principal.
Excel screenshot

8
 =PPMT function in excel

• This can also be calculated using excel formula, PPMT.

• Format is: =PPMT(rate,Payment #,nper,pv,[fv],type)
• So we put in as follows in excel:
=PPMT(5%,1,10,1000,0,0)
• This gives answer as $79.50.
• This is the amount by which the principal due of $1,000
is reduced after you make the first payment.
• So now the principal due = $1000 - $79.50 = $920.50
• So for second period, your interest is only on amount
due at the start of this period (i.e., $920.50; it was $1,000
at the start of period 1).
PPMT in excel - example

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 Using excel for IPMT & PPMT

• You can calculate interest amount and principal

reduction for each period.
• You can set up a table in excel.
• So, for interest for period 2, formula is:
=IPMT(5%,2,10,1000,0,0)
• Notice, the second number [after the 5%] now is 2,
because it is period number 2.
• Similarly, fill in the rest of the table.
• Note that payment is same ($129.50) each period!
• See next slide for rest of the excel table.
Interest & Principal table in excel -
example