Question One: A person has $25,000 to lend for 20 years.
What is the monthly payment
received if the annual interest rate is 3 percent per year?
What is the monthly payment received
if the annual interest rate is 6 percent per year?
Answer: This problem is solved below with the PMT
function.
Impact of Interest Rates on Bond Payments


rate

nper

PV

PMT

0.03

240

25000

$138.65

0.06

240

25000

$179.11

Diff.

$40.46

Question Two:
How much should a person loan to receive a $300 monthly payment on a loan when
the annual interest rate is 3 percent per year?
How much should a person
invest to receive a $600 monthly interest payment on a bond at the same 3
percent annual interest rate?
Answer: The required loan is calculated with the PV
function.
Required Bond Purchase


Rate

nper

PMT

PV

0.03

240

300

$54,093.27

0.03

240

600

$108,186.55

Note that when the interest
rate is doubled and the term (nper) is unchanged the required bond purchase
doubles.
Note also that the two
problems presented here involve loans not bonds. The output from the PMT function is both interest and
repayment of principal.
More questions solving finance problems in Excel can be found here.
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