![]() pmt is the additional payment made during each period.nper is the number of payment periods for which you want to compute the future value.rate is the interest rate per payment period.Syntax of this function is as follows: =FV ( rate, nper, pmt,, ) The function assumes a periodic and constant payment made with a constant interest rate. The Excel FV function is a financial function that returns the future value of an investment. The term FV is short for “ Future Value”. The second method to compute the compound interest is using the FV function. Using the FV Function to Calculate Compound Interest in Excel This means the formula works with all scenarios. How can we find the compound interest after 10 years? Take the following example where you’ve invested $1,000 in a bank that compounds yearly at an annual interest rate of 8%. ![]() Now let us see how we can calculate the compound interest in Excel. Also read: Percentage Difference Calculator Excel Two Ways to Calculate Compound Interest in Excel If interest is compounded on a monthly basis, then t=12. If interest is compounded quarterly, then t=4. Here, t is the number of compounding periods in a year. This means we can further generalize the compound interest formula to: P(1+R/t) (n*t) So, if you want to compute the worth of your $100 investment after 10 years, in this case, it is going to be: 100(1+0.05/2) (10*2) =$163.86 ![]() ![]() The interest rate will then need to be divided by 2 and the time period multiplied by 2 in the above formula. This means there are 2 compounding periods in a year. Let’s say the bank offers an annual interest of 5%, which is compounded semi-annually (twice a year). Let us take another example to demonstrate this. Note that the above formula works in all cases, whether your interest is compounded annually, semi-annually, monthly or weekly. This means, if N is the number of years (in this case), then the formula for the Compound interest accumulated will be: P(1+R) N Similarly, at the end of the third year, the amount increases to P(1+R) 2 +P(1+R) 2*R or P(1+R) 3. If your principal amount is represented by a P and interest is represented by R, then at the end of the first year, the amount in your account is P+(P*R) or P(1+R).Īt the end of the second year, the amount increases to P(1+R)+P(1+R)*R or P(1+R) 2. Let us understand the compound interest calculation in a little more detail. Also read: How to Calculate Growth Rate in Excel How to Calculate Compound Interest? In fact, Compound interest is the biggest reason most people find it difficult to pay back their student loans even years after passing out of school/college (or credit card loans). The same happens when you borrow money from a bank. In comparison with Simple Interest, Compound Interest is different as it also earns you interest on the interest, while in Simple Interest, you only earn the interest on the base value.īelow is an example, where I have calculated simple and compound interest for 10 years or the base payment of $100 with a 5% annual interest rateĪs you can see, due to the compounding effect, the return when compound interest is applied is higher than simple interest. Your bank account now contains $105+$5.25=$110.25.Īt the end of the third year, you again get 5% of $110.25 (=$5.51) added to your account. So you now get 5% of $105 (=$5.25) added to your account. In other words, your bank account now contains $105.Īt the end of the second year, you will earn interest on this compounded amount (not just your initial deposit). Let’s say you initially deposit $100 to a bank that offers an interest rate of 5% compounded yearly.Īt the end of the first year, 5% of $100 (=$5) gets added as an interest to your initial amount. To understand the concept, let’s take an example. Since you are having the interest compounded with the passage of time, your initial sum grows at a much faster rate than the simple interest (which only applies to the principal amount). You can think of compound interest as a sort of ‘interest on interest’. Using the FV Function to Calculate Compound Interest in ExcelĬompound interest is the interest on both the initial principal amount, as well as the interest accumulated over the past periods.Using the General Compound Interest Formula to Calculate Compound Interest in Excel.Two Ways to Calculate Compound Interest in Excel. ![]()
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