This Short Project In Week 7 Allows Students To Calculate

This short project (also in Week 7) allows students to calculate mortgage payments using all of Excel’s functionality for principle, interest, and future value

This short project in Week 7 provides an opportunity for students to utilize Excel to compute mortgage payments comprehensively. The task involves creating a detailed mortgage amortization schedule that includes principal payments, interest payments, remaining balances, and total payments for each installment period. The aim is to apply Excel's formulas to automate calculations, ensuring accuracy and efficiency in financial modeling.

Students are instructed to start by creating a new spreadsheet and designing a layout that systematically organizes the relevant data. The key components of the spreadsheet should include columns for Payment Number, Payment Amount, Interest Payment, Principal Payment, and Remaining Balance. The layout should be clearly labeled and aligned for readability. Once the layout is established, students must populate the spreadsheet with initial data and formulas to perform the calculations dynamically. All formulas should reference the appropriate cells, with absolute references used for constants such as the annual interest rate, the total number of years, number of payments per year, and the initial loan amount.

The calculation process begins by setting the initial loan amount as the starting balance. For the first payment, the interest is computed based on the initial balance multiplied by the interest rate per period, which is derived by dividing the annual interest rate by the number of payment periods annually. The payment amount can be calculated using the PMT function in Excel, which considers the interest rate per period, total number of payments, and loan amount. This payment should be entered as a negative value to represent money outgoing from the borrower's account.

Next, the interest payment is calculated by applying the periodic interest rate to the current balance. The principal payment is obtained by subtracting the interest payment from the total payment. The new balance is then determined by deducting the principal payment from the current balance. This process is repeated for each subsequent payment period, creating a dynamic amortization schedule that reflects the gradual reduction of the loan balance over time.

Throughout the spreadsheet, formulas must be used to ensure that calculations update automatically when input variables change. Absolute cell references for key variables (interest rate, number of years, payments per year, loan amount) help maintain consistency across formulas. Additionally, all payments are to be shown as negative values, with parentheses indicating outgoing payments, aligning with standard accounting practices.

Paper For Above instruction

Mortgage financing is a critical aspect of personal finance that involves borrowing funds to purchase property, with borrowers agreeing to repay the loan over a fixed period through periodic payments. Excel is an invaluable tool that simplifies the complex calculations involved in mortgage amortization, making it accessible for students and professionals alike to visualize and analyze loan schedules effectively.

The process of creating a mortgage amortization schedule in Excel begins with setting up a clear layout that accommodates all relevant data points. These include the payment number, total payment amount, interest component, principal component, and remaining balance. Designing the spreadsheet to automatically update based on input variables enhances the learning experience and provides flexibility for different loan scenarios.

The foundation of mortgage calculations lies in understanding the relationship between the loan's principal, the interest rate, and the payment schedule. The interest rate per period is derived by dividing the annual rate by the number of periods per year (e.g., 12 for monthly payments). This rate influences the size of each interest payment, which is computed by multiplying the current balance by the periodic interest rate. Using Excel's PMT function, students can calculate the fixed payment amount that ensures the loan is paid off at the end of the term, considering all variables.

Once the total payment is established, dividing it into interest and principal components allows students to visualize how each payment contributes to reducing the overall debt. The interest portion decreases over time while the principal portion increases, a phenomenon known as amortization. This dynamic is illustrated through formulas that update each period's interest, principal, and remaining balance.

In terms of practical application, the spreadsheet should also incorporate absolute referencing to constants such as interest rate, total number of payments, and loan amount. This approach guarantees that key variables remain constant across all formulas, preventing errors and facilitating adjustments for different loan conditions. Displaying payments as negative numbers, with parentheses, aligns with standard financial reporting and enhances clarity.

Ultimately, this project demonstrates the power of Excel in financial analysis, enabling users to not only calculate mortgage payments but also to explore how changes in interest rates, loan terms, or amounts influence payment structures. Such skills are essential for financial planning, advising clients, or managing personal debt responsibly.

References

• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. John Wiley & Sons.
• Excel Easy. (2023). Calculate Loan Payments with PMT Function. https://www.excel-easy.com/functions/pmt-function.html
• Gurung, S., & Shrestha, S. (2020). Financial Modeling and Analysis Using Excel. Journal of Finance and Accounting, 8(2), 45-52.
• Investopedia. (2023). Mortgage Amortization Schedule. https://www.investopedia.com/terms/m/mortgageamortization.asp
• MyFinanceLab. (2022). Using Excel for Loan Calculations. Pearson Education.
• Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
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• Wikipedia. (2023). Amortization Schedule. https://en.wikipedia.org/wiki/Amortization_schedule
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