Example 1 - Conventional Mortgage or Loan
This example applies to our online demo Time Value of Money Calculator. The C-Value! program for Windows works in a similar way and has a few more features. Note, our online demo TVM calculator is limited to calculations using interest rates between 2.0% and 8.99%
A conventional mortgage or loan with an unknown payment amount and regularly scheduled payment periods.
This example goes into more detail than any other example. At first, it may seem that a lot of steps are required to create a simple calculation or schedule. Actually, that's not the case. Most steps described are not required every time you setup a calculation. We go into extra detail here so that (1) you can see what options are available to you; and (2) see that the options are set the way we expect them to be otherwise you may get results other than those shown.
Note. Dates in all examples are shown using the US convention of MM/DD/YYYY. Purchasers of this calculator may make changes to use any international date convention.
- Confirm that the TVM Calculator's settings are set for a conventional loan:
- There are many "Calculation Options". If you are not getting the results you expect, most likely the problem is due to the way one of these options are set. You should make particular note of the "Interest Calculation Options".
- Click on the
menu choice at the top and select . (Menu choices are shown inside curly braces
- On the "Compute/Amortization Methods" page set the compute method to "Normal".
- Click on the "Days Per Year" tab. Set the "Days In Year" to "360". (Again, you only need to do this if you are trying to match our examples.)
- Click on the "Interest Calculation Options" tab. If the initial period is longer than your normal period set the interest option to "Amortized — paid evenly". If the initial period is shorter then your normal period set the option to "Reduce all payments". (Initial long and short periods are explained on the options window.)
- Our examples do not use the "Canadian Method", so you do not need to make any settings on the final tab on this window.
- Click [OK] to close the window and save your settings.
- Set "Rounding" to "Last Payment" by clicking on the "Rounding" button.
- Many loan and investment schedules need some adjustment made to the final cash flow. If the last cash flow is not rounded (adjusted) the balance will usually not work out to be exactly zero. The "Open Balance" option leaves the balance unadjusted so you can see the rounding "error". All the other options adjust the cash flow in some way so that the final balance is zero.
- Clear any prior inputs by selecting
from the menu choice or by clicking the [New] button on the calculator's bottom left.
- Select a "Compounding" frequency. Monthly compounding is most typically used.
- Enter the "Nominal Annual Rate". All rates are entered as a percentage (not as decimal equivalents). That is, for a 4.5% enter 4.5. Do not type in the percent sign.
- Click on the first row of the cash flow area. For the first row, set the "Event" to Loan. ("Events " describe the cash flow type. After clicking the [New] button, and only one row is visible in the cash
flow grid, you can setup either an investment cash flow or a debt cash flow. After the initial selection, you'll only be able to select debt or investment cash flow "Events" which ever are appropriate based on your first selection.)
- Type [Tab] to move to the "Date" column. This date, called the loan date, is the date the monies become available. It is sometimes known as the origination date. If you are borrowing money and the bank gives you the money on September, 1 2011, then you would enter 09/01/2011 or use the drop down calendar to set the date.
- Hit the [Tab] key to move to the "Amount" column. Enter the amount of the loan. For this example, enter 250,000.00. When entering numbers, do not enter commas. They will be entered for you. Also, there should not be any need to use the [backspace] key or [delete] key to clear a value. If you use the [tab] key to move to the amount column or click in the column with your mouse, the current value will be selected. Just start typing to clear it.
- Hit [Tab] to move to the "# Periods" column. For normal loans, monies are only advanced once. Therefore, for 99.9% of all loan events, you'll want to enter a 1 in this column.
- For a loan event with one period, there are no other settings that need to be made in the first row.
- Hit [Tab] again. This will cause a second row to be inserted into the input area. For the "Event", select Payment if it is not already selected.
- Hit [Tab] to move to the "Date" column. Enter the date that the first payment is due. Please enter 10/01/2011 .
- Type [Tab] once more to move to the "Amount" column. Since the payment amount is unknown, type a U. The word "Unknown" will be displayed.
- Hit [Tab] again to move to the "# Periods" column. For this example, we'll assume a 15-year loan with monthly payments. Enter 180
- Type [Tab] again. This time, your focus will move to the "Frequency" column. Select Monthly. This tells the TVM calculator that you want the payment frequency to be monthly starting with the first payment due on October 1st, 2011. Notice when "# Periods" is greater than one, the "End Date" is calculated. NOTE: when you want to enter additional events, the event on the following row must be on or after the prior row's "End Date".
- We are now ready to calculate the unknown value. Your screen should now look like this:
- Calculate — Click on the [Calc] button at the bottom of the calculator or click
and select on the top menu.
The word "Unknown" will be replaced with the monthly payment amount. Assuming you are using the standard default settings the result will be $2,042.71.
Below, a sample of the detailed (printable) amortization schedule. (A similar schedule is available for investment cash flows.)
- To "visualize" the loan details, don't forget to check out the three charts. They are automatically created. There's nothing to enter.
- Click on the [Chart] tab next to [Schedule]. Then select the three inside [Chart] tabs as desired.