hpr-knowledge-base/hpr_transcripts/hpr1585.txt

Episode: 1585
Title: HPR1585: 36 - LibreOffice Calc - Financial Functions - Loan Payments
Source: https://hub.hackerpublicradio.org/ccdn.php?filename=/eps/hpr1585/hpr1585.mp3
Transcribed: 2025-10-18 05:22:13

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Hello, this is Ahuka, welcoming you to Hacker Public Radio and another
exciting episode in our ongoing series on LibreOfficeCount.
What I'm going to do today is I'm going to get into financial functions.
Last time we looked at all the different kinds of functions available but we
got to have to really demonstrate a little bit about how to use some of these
things. What I want to do is get into financial functions
probably this and the next episode. Then do maybe a few on statistical functions.
I don't think I'm going to delve into every single function.
The idea that I want to get across to you is that once you get comfortable working with functions,
you can explore the rest of them on your own. There's a huge number of functions available
and many of them you may not be interested in. So I'm going to try and pick some that I think
might have some interest at least and show you how to use those and maybe with those tools,
you'll be able to delve into others if you have specialized needs and want them.
So for this one, financial functions, I'm going to look at something involving loan payments
because that's one of those things most of us end up having to deal with one way or another.
Now, when we first introduced the topic of spreadsheets, we said that spreadsheets was the killer app
that led to the widespread adoption of PCs and companies. And the reason for that was that you
could do sophisticated financial analysis with spreadsheets. So it should not come as any great
surprise that there are many wonderful financial functions in Calc. The thing that you need to
bear in mind about these is that they're all oriented to doing financial analysis on investments.
But if you take the time to understand what these functions are doing, you can often use them in
other ways. And I'm going to show you how. As we pointed out, all functions in Calc take arguments.
And in this case, you might expect the arguments would have to do with interest rates,
principal amounts, time periods, payment amounts, and that sort of thing.
The general form of such a function ties all of these together in a relationship that let you
specify all but one of them and then solve for the remaining one. Here's an example, courtesy
of a site called WikiHow.com, which does offer their material under a creative commons license.
So I am satisfying the terms of the license by telling you where I got it. And in fact,
the link will be in the show notes. Looks like a good site. You might find some other things you like
there. So here's the function m equals p times open parentheses j divided by open parentheses
again, one minus open parentheses a third time, one plus j closed parentheses raised to the power
of minus n closed parentheses closed parentheses. Well, that was certainly very clear, wasn't it?
So what are these? m is the monthly payment, p is the principal amount of the loan,
j is the monthly interest, which is the annual interest divided by 12 and then to take it from an
interest to a decimal divide by 100. It doesn't matter which order you do those, divide and then divide.
What is that commutative, I think, or transitive or something? That's been used since I had to learn all of that stuff.
So what's going on here? Basically, you borrow some amount p, which you need to repay.
And you will make payments for n number of months. But you cannot simply divide p by n to get
your monthly payment, because you also need to pay interest on the loan. Interest is usually given
as an annual percentage, such as 8% per year. To use this in a calculation, you need to convert
the percentage into a decimal, and that means dividing by 100 to get 0.08.
But generally, you don't pay interest once a year, you pay it every month in your payments.
So the last adjustment is to divide by 12 to get 12 monthly payments. Now, having said this,
the calculation we're about to do may not exactly match what your bank calculates.
It depends on compounding, and banks are very ingenious at finding ways to have one number that says
this is what we're charging, and somehow turn it into something that gets them even more.
I'm not going to dig into it, because this is a tutorial on CALC. It's not a course in advanced finance.
So once you have this formula, you can do a simple model in a spreadsheet, where if you plug in any
three of the variables, you can calculate the fourth one. For example, suppose the car dealer makes
you an offer. You can either get $1,000 off on the price of the car, or get a half a percent
lower interest rate, which is the better offer. Well, let's put in some actual numbers and do a
calculation here. Suppose the car you're looking at normally sells for $19,000. You are looking at a
four-year loan, and the normal interest rate on these loans is 8%. You can put this into a spreadsheet
and do a quick calculation. I set up one of these on a sample spreadsheet like this. First, I selected
sales A1 through C1. I click on the merge and center sales button on the formatting bar.
Now, this is the one that's just to the right of the left align center, right align and justify,
and as the name suggests, when you click the merge and center sales button, it merges the
sales and then centers whatever you put in. So I type in manual model, make it bold and increase
the font size to aerial 12. This is just putting a little header on the stuff that I'm going to do.
Just to make it a little easier to to read, I'm going to right-click on that, select format
sales background and give it a nice blue background. It's not strictly necessary,
but it makes the spreadsheet a little more attractive and I think it's just a little bit easier to
read and that's not a bad thing. Okay, so I got my header set up and that's on the first row.
Then in cell A2, I type price of car and in cell B2, I type 19,000.
In cell A3, I type periods and in cell B3, I type 48. This represents a four-year loan with 48 monthly payments.
In cell A4, I type interest rate and in cell B4, I type 0.08.
Now, because the interest rate is given as an annual rate and I want to do monthly payments,
I'm going to do an intermediate calculation. In cell A5, I type monthly interest rate and in cell
B5, I type B4 divided by 12. Now, this is the raw material for my calculations.
The variable I left out is the monthly payment and that's what I would solve for.
Now, in cell A7, I type base case, then I skip a line because I'm going to do some comparisons.
In cell A9, I type scenario A and then in cell A10, I type 1000 off the price.
I drop down a little bit and in cell A13, I type scenario B and then in cell A14, I type 0.005 reduction in rate.
Now, that is half a percent because I have to remember I have to divide by 100 to get the decimal
equivalent of half a percent. Then in column C, I will put my answers. So in cell C2, I type to
monthly payment. Now, I'm going to use my math skills. In cell C7, opposite base case, I put
in my formula, replacing the variable names in the above formula with cell addresses. So now the
formula reads B2 times open parentheses, B5 divided by open parentheses, 1 minus open parentheses,
1 plus B5, closed parentheses, raised to the power of minus B3, closed parentheses, closed parentheses.
Now, this is really the same thing as the formula that I gave you before with m and p and j and n.
That's fine. That's exactly what I'm trying to do. So I simply replace those with cell addresses
of cells that have that data in it. Now, I haven't actually put in any scenario adjustments,
and that's fine because what I'll do is I'll copy the formula exactly and put it into cell C10
for my first scenario and then in cell C14 for my second scenario. So I click on C7,
go to the formula bar, highlight the formula and then copy it, then go to cell C10, click on it and
paste, do the same thing for cell C14. So now I have the same number in all three of these cells.
It is the monthly payment if you borrow 19,000 at 8% annual interest for 48 months,
and it comes to $463.85. But I need to adjust for my scenarios, which I have not done
yet. So now I go back to cell C10, click on it and edit the formula.
The scenario is reducing the price of the car by 1,000. Since the price is in cell B2,
I can replace B2 in my formula with open parentheses, B2 minus 1,000 close parentheses.
Note that the parentheses are very important here. If you want to calculate the reduced amount
borrowed, you want to do that before you do the multiplication. Leave that out, you get a very
bad answer indeed, but do it right and you should get $439.43. So in rough terms you knock 24
bucks a month off the payment. Now what about the second scenario? That was reducing the annual
interest rate by .05. But again, I need to get this in monthly terms, and that means dividing by
12. So again, I'm going to do an intermediate calculation. In cell A15, I type monthly interest
in cell B15, I type equals open parentheses B4 minus .005 close parentheses divided by 12.
Again, make sure you put the parentheses around that B4 minus .005 because you need to do that
calculation before you do the division. Now, in my formula in cell C14, I make the adjustment
by replacing every instance of B5, the old interest rate number, with B15, my new number.
So now my formula reads equals B2 multiplied by open parentheses B15 divided by
open parentheses 1 minus open parentheses 1 plus B15 close parentheses raised to the power
of minus B3 close parentheses close parentheses. And my new monthly
of payment appears to be $459.40. So I would be better off taking the $1,000 discount instead of
the interest rate reduction in this particular case. Now, this is probably seems a little
bit complicated, fairly difficult to do if you're not used to doing financial calculations,
so wouldn't it be nice if you could do the same thing with a built-in function? And you can.
There is a financial function called PMT that handles this very nicely.
But note, you need to have gathered the same information we used above for our manual calculation.
The PMT function has these arguments. First one is rate. Well, that's what we had above for
our interest rate, but it should be the annual rate divided by 12 to get the monthly rate,
not just the annual rate. NPR stands for number of periods, which in our example is 48.
PV is the present value, which in this case is the amount you borrowed. In other words,
19,000. FV is the future value, which we're going to assume you pay off everything you borrow,
so at the end it should be zero. Then there's something called type, which is optional.
A variable that specifies when the payment occurs each month. If you enter zero or leave it blank,
it is assumed to be the end of the month. If you enter a one, it means your payment is at the
beginning of the month. The difference is slight in either case.
So, I added another section to my sheet to show what happens if I use the built-in formula.
To do this, you begin by clicking on the cell where you want the formula to be calculated,
then go to the function key and select it.
Select financial in the category drop-down, then scroll down to PMT. Select it and click next.
This will bring up a window on the right with fields for each of your variables.
Now, you could type in numbers, but that is not the way to do it. I keep telling you,
cell addresses is the way to go. So, to grab the cell addresses, we click on the field to put our
insertion mark there, then click on the cell, and it will be added to the field.
So, to do a comparison, I go to cells A18 through C18,
click the merge and center cell button, apply font styles and background as before,
but now I'm going to call it using the PMT formula. So, that's the header for this section.
So, in cell A20, I type base case, in cell A22, I type scenario A, in cell A24, I type scenario B.
Then, in cell C20, I click on the function when wizard, select the PMT function and fill it out
using the numbers we got earlier. Rate, that's cell B5, N per cell B3. FV is cell B2.
PV, I'm sorry, is cell B2. FV is left blank, which means it's assumed to be zero.
In other words, the loan will be completely paid off.
Then, for scenario A, rate is B5, N per is B3. Present value, cell B2 minus 1000.
FV is still blank. For scenario B,
rate is cell B15 now, N per, number of periods, that's still cell B3. Present value is cell B2.
Future value, left blank. And when you do that, what numbers do you get?
For the base case, $463.85. For scenario A, $439.43.
And scenario B, $459.40.
And these are exactly the numbers we got previously, or almost so. There is one difference.
They're reported as negative numbers. But that only means that they are money being paid out
rather than money coming in. Remember, we're using a function used to evaluate investments
and just turn it around. So, don't worry about those minus signs. As long as you understand what
you're doing, don't worry about it. So, lessons learned. The formula we use to do the manual
calculation is obviously the exact same formula that Calc used to get these monthly payment numbers.
I went through this exercise in part to demonstrate that idea and to give you some sense of
what is going on behind the scenes when you use a formula. I probably won't do it again,
but I thought it was worth doing once. The first step in using a formula is to look at the arguments
it requires, and make sure you have them ready to hand. If you are not sure what each variable really
means, do a little Google research. One thing that may help is that in the cases I have investigated
so far, the Calc functions and the Excel functions are identical. You may find it easier to get a
good explanation off an Excel help site. If so, use it. You don't get bonus points for avoiding
the best information. And the last one. I did intermediate calculations several times in my
example. Well, these are not strictly necessary, but they are usually a good idea. I could have made
my formulas even more complicated by adding the adjust terms into them directly. But the problem is
your formulas quickly become almost impossible to debug that way. A good intermediate calculation
lets you move some of that outside the formula, and you can usually do a quick sanity check to see
if the number you get is plausible. For instance, if you divided by 12, did the answer look like
112 to what you started with? Okay, so I did all of this on a spreadsheet. I have uploaded it to my
website. You can download it. Take a look at it. I encourage you to do that. And see if you can follow
along with the things that I did. I understand that this can be a little tricky to do in audio.
And so check the show notes and everything will be there. So for now, this is Ahuka
signing off for Hacker Public Radio. Reminding everyone to support free software. Good bye.
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