Question

Which built-in function can be used to compute monthly instalments of repayment of loan? State its parameters also.

Hint:

Use PMT when you want to calculate fixed monthly instalments for a loan based on rate, term, and principal.

Answer 1

To compute monthly instalments of a loan, we use the built-in PMT (Payment) function available in Excel and other financial software.
Syntax of PMT function:
\[ \text{PMT}(rate, nper, pv, [fv], [type]) \] Parameters: \begin{itemize} \item rate – The interest rate for each period. If annual rate is 12% and payments are monthly, rate = 12%/12 = 1% or 0.01. \item nper – Total number of payment periods. For a 5-year loan with monthly payments, nper = 5 × 12 = 60. \item pv – Present value or principal amount of the loan. \item fv – (Optional) Future value. If omitted, it is assumed to be 0. \item type – (Optional) 0 or 1, where 0 = payment at end of period (default), 1 = payment at beginning. \end{itemize} Example: For a loan of \rupee5,00,000 at 12% annual interest for 5 years paid monthly, the formula would be:
\[ \text{=PMT}(0.01, 60, 500000) \] This returns the fixed monthly EMI amount to be paid.