In the case of quarterly compounding, compound interest can be calculated using the below formula:įuture Value of Investment = P*(1+R/4)^(T*4)įuture Value of Investment = P*(1+R/12)^(T*12) Note that you need to specify the rate as 10% or 0.1. The future value of the investment can be calculated using the following formula: In the case of yearly compounding, compound interest can be calculated using the below formula: Now let’s have a look at different examples of calculating compound interest in Excel. In the case of monthly compounding, N is 12. In the case of quarterly compounding, N is 4. In the case where the interest is compounded annually, N is taken as 1. N – Number of time interest is compounded in a year.For example, when the compound interest is 10%, use 10% or. Note that the rate needs to be in percentage in Excel. P – This is the principal amount or the initial investment.So here is the formula for calculating the value of your investment when compound interest in used: Future Value of Investment = P*(1+ R/N)^(T*N) The formula for compound interest at the end of five years is: =B1 * 1.1 * 1.1 * 1.1 * 1.1 * 1.1 So the investment grows to 1210.Īt the end of five years, the investment grows to 1610.51. Now in the second year, the interest is paid on USD 1100. Suppose you invest USD 1000 at a 10% interest rate.īy the end of Year 1, your investment grows to USD 1100. Let’s see how investment grows year-on-year when calculating compound interest is Excel. Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods, and can thus be regarded as “interest on interest.’ ( Source: Investopedia). ‘Simple interest is calculated on the principal, or original, amount of a loan. At the end of 20 years, compound interest will make your investment grow to USD 6727.5.Īs you can note, the investment with compound interest grew twice as compared with the one with simple interest. In the second year, your investment grows to USD 1210 (this happens as in the second year, you earn interest on 1100 and not 1000). So if you invest USD 1000 for 20 years at 10% rate, the first year your investment grows to USD 1100. Simple Interest simply calculates the interest amount based on the initial investment, total number of years, and the rate of interest, For example, if you invest USD 1000 for 20 years at 10% rate, you will get USD 3000 a the end of 20 years (that is USD 100o of your initial investment and 2000 of the simple interest).Ĭompound Interest, on the other hand, calculates interest on the interest amount as well. What is the difference between Simple Interest and Compound Interest? The benefit of compounding is that even you interest would earn interest. Since now you had USD 1100 in the account, the bank pays you 10% interest on 1100 (which includes the USD 1000 you invested at the beginning and the USD 100 interest you earned at the end of the first year). And the bank did its part and added 10% at the end of the year. Now since you didn’t have any immediate use of the money, you let it stay in the account. Suppose you invest USD 1000 in a bank account that promises to give you 10% return at the end of the year. Let me take a simple example to explain it. Using Excel FV Function to Calculate Compound Interest.What is the difference between Simple Interest and Compound Interest?.
0 kommentar(er)
