A time deposit is a type of bank account that pays a fixed interest rate for a specified period of time. The depositor agrees to keep the money in the account until the maturity date, and cannot withdraw it before that without paying a penalty. Time deposits are also known as certificates of deposit (CDs) or term deposits. They are considered a safe and low-risk investment, as they are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank.
A loan is a type of debt that a borrower obtains from a lender, usually a bank or a financial institution. The borrower agrees to repay the loan with interest over a period of time, according to a repayment schedule. The interest rate is the cost of borrowing money, and it depends on various factors, such as the creditworthiness of the borrower, the type and amount of the loan, and the market conditions. Loans can be used for various purposes, such as buying a car, a house, or a business, or paying for education, medical expenses, or personal needs. Loans are also known as credit or financing. They are considered a risky and high-cost form of debt, as they can affect the borrower’s credit score, income, and assets, and may lead to default or bankruptcy if not repaid on time.
Basic Theory:
Time deposit and loan calculations involve the use of fundamental financial concepts such as present value (PV), future value (FV), interest rates, and the time value of money. The time value of money asserts that a sum of money today is worth more than the same sum in the future due to its earning potential.
Procedures:
- Understand the Variables:
- PV (Present Value): The initial deposit or loan amount.
- FV (Future Value): The amount after a specified period.
- Rate: The interest rate per period.
- Nper: The total number of payment periods.
- Choose the Right Formula:
- For time deposits: FV = PV * (1 + Rate)^Nper
- For loans: PV = FV / (1 + Rate)^Nper
- Set Up Your Excel Sheet:
- Create a table with columns for PV, Rate, Nper, and the calculated FV or PV.
- Utilize Excel functions like POWER, SUM, and PRODUCT to perform the calculations.
- Use Absolute Cell References:
- When using the formulas, lock the cell references using the $ sign to ensure they don’t change when copied to other cells.
Scenario:
Let’s consider a time deposit with an initial amount of $10,000, an annual interest rate of 5%, and a tenure of 3 years.
| Initial Deposit | Interest Rate | Tenure | Future Value (FV) |
|---|---|---|---|
| $10,000 | 5% | 3 years | =A2*(1+B2)^C2 |
Calculation:
FV = $10,000 * (1 + 0.05)^3
FV ≈ $11,576.25
Result:
After 3 years, the time deposit will grow to approximately $11,576.25.
Other Approaches:
- Loan Repayment Calculation:Use the PMT function in Excel to calculate the periodic payment for a loan.
=PMT(rate, nper, pv, [fv], [type])Where:
- rate: Interest rate per period.
- nper: Total number of payment periods.
- pv: Present value (loan amount).
- fv: Future value (optional).
- type: Payment at the beginning or end of the period (optional).
- Scenario Sensitivity Analysis:Explore different scenarios by changing interest rates or tenure and observe the impact on future values or loan payments.
