How to calculate Compound Interest in Excel

In this article, we will learn How to calculate Compound Interest in Excel.

What is Compound interest ?

Compound Interest is a financial term, which is when addition of interest to the principal sum of a loan or deposit. You must be confusing it with Simple Interest or called nominal Interest. Nominal Interest is the Interest paid over the period without inflation. So Interest calculated over the inflated amount is called Compound interest.

Compound Interest =>  A = P(1 + r/n)^nt

A - compound interest

P - Initial amount

r - Interest rate

n - number of periods per time period

t - time elapsed

Compound interest formula using FV Function in Excel

Future value function returns the future value of the present  amount having interest rate over a period.

Syntax:

rate: Interest rate per period

nper: total no. of payment period.

pmt: amount paid each period.

pv - [optional] The present value of future payments must be entered as a negative number.

type - [optional] When payments are due. Default is 0.

Example :

All of these might be confusing to understand. Let's understand how to use the function using an example. Here

Excel Compound interest formula

B2/B4: rate is divided by 12 as we are calculating interest for the monthly period.

-B1: present amount to be considered as negative to get the return in negative.

Compound Interest for the following data will be

As you can see future value gets the compound interest for the data.

Another example

Here we have the amount of $100,000 as present value considered over a period of year (12 months) at a rate of 6.5%.

And we need to find the new amount for the data after one year. We will use the FV function formula to get that new amount or future value.

Use the Formula:

Explanation:

B2/12 : rate is divided by 12 as we are calculating interest for monthly periods.

C2 : the total time period (in months)

0 : no amount paid or received between the total period

-A2 : amount is in negative so as to get the future value amount in positive.

Here arguments to the function are given as cell reference.

Press Enter to get the result.

This function returns a value of the amount $106,697.19 as future value for the dataset.

Here are all the observational notes using the compound Interest in Excel
Notes :

1. Be careful using the rate and npr argument in FV function. If monthly payments on a six-year loan at 15 percent annual interest, use 15%/12 for rate and 6*12 for nper. If made an annual payment on the same loan, use 15% for rate and 6 for nper.
2. When working with Excel currency values. The amount represented in negative such as deposits to savings. dividends and checks to be input as positive numbers.
3. Excel stores dates as serial numbers and is used in calculation by the function. So it’s recommended to use dates as cell reference instead of giving direct argument to the function. Check the date values if the function returns #VALUE! Error.

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