Compound Interest in Excel Formula
Compound interest is the addition of interest to the principal sum of a loan or deposit, or we can say, interest on interest. It is the outcome of reinvesting interest, rather than paying it out, so that interest in the next period is earned on the principal sum plus previously accumulated interest.
While simple interest is calculated only on the principal and (unlike compound interest) not on principal plus interest earned or incurred in the previous period.
The total accumulated value, including the principal sum P plus, compounded interest I, is given by the formula:
Where,
- P is the original principal sum
- P’ is the new principal sum
- n is the compounding frequency
- r is the nominal annual interest rate
- t is the overall length of time the interest is applied (expressed using the same time units as r, usually years).
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For eg:
Source: Compound Interest Formula in Excel (wallstreetmojo.com)
How to Calculate Compound Interest in Excel Formula? (with Examples)
Let us understand the same using some examples of the Compound Interest formula in excel.
Example #1 – Using Mathematical Compound Interest Excel Formula
Suppose we have the following information to calculate compound interest in excel.
Now, as we have described the formula above also, we will implement the same in MS Excel using cell references in excelCell References In ExcelCell reference in excel is referring the other cells to a cell to use its values or properties. For instance, if we have data in cell A2 and want to use that in cell A1, use =A2 in cell A1, and this will copy the A2 value in A1.read more and various operators.
- As the C2 cell contains the principal amount (We can also call it as present value). We need to multiply this value with the interest rate.
- In our case, the interest is to be compounded quarterly (C5) that is why we need to divide the annual interest rate with cell C5
- As interest is being compounded four times in a year, we need to give reference to a cell where the number of years is mentioned so that we can multiply 4 with a number of years. That is why the formula would be like this:
- After pressing the Enter button, we will get the result as Rs. 15764.18 as the future value with compound interest.
This is like a compound interest calculator in excel now. We can change the value for Annual Interest Rate, the number of years, and Compounding periods per year as below.
Example #2 – Using the Compound Interest Calculation Table in excel
Suppose we have the following information to calculate compound interest in a table excel format (systematically).
Step 1 – We need to name cell E3 as ‘Rate’ by selecting the cell and changing the name using Name Box.
Step 2 – We have the principal value or present value as 15000, and the annual interest rate is 5%. To calculate the value of the investment at the end of quarter 1, we will add 5%/4, i.e., 1.25% interest to the principal value.
The result is shown below:
Step 3 – We just need to drag the formula till C6 cell by selecting the range C3: C6 and pressing Ctrl+D.
The future value after four quarters will be Rs. 15764.18.
Example #3 – Compound Interest Using FVSCHEDULE Excel Formula
Suppose we have the following information to calculate compound interest in excel.
We will use the FVSCHEDULE function to calculate future value. FVSCHEDULE formula returns the future value of an initial principal after applying a series of compound interest rates.
To do the same, the steps are:
Step 1 – We will initiate writing the FVSCHEDULE function into cell B6. The function takes two arguments, i.e., principal and schedule.
- For the principal, we need to give the amount which we are investing in.
- For the schedule, we need to provide the list of interest rates with commas in curly braces to calculate the value with compound interestCompound InterestCompound Interest is the interest earned from the initial Principal & the previously accumulated Interest amount. This is also known as “Interest on Interest” & it is always higher than the Simple Interest. read more.
Step 2 – For ‘principal,’ we will provide the reference of B1 cell, and for ‘schedule,’ we will specify 0.0125 as this is the value we get when we divide the 5% with 4.
The result is shown below:
Now we apply the FVSCHEDULE formula in excel.
Step 3 – After pressing the Enter button, we get Rs. 15764.18 as the future value with compound interest in excel.
Example #4 – Compound Interest Using the FV Excel Formula
Suppose we have the following data to calculate compound interest in excel.
We will use the FV excel formula to calculate compound interest.
FV function (stands for Future Value) returns the future value of an investment based on periodic, constant payments and a constant interest rate.
The syntax of the FV function is
The argument in the FV function is:
- Rate: Rate is the constant interest rate per period in an annuity.
- Nper: Nper stands for the total number of periods in an annuity.
- Pmt: PMTPMTPMT function is an advanced financial function to calculate the monthly payment against the simple loan amount. You have to provide basic information, including loan amount, interest rate, and duration of payment, and the function will calculate the payment as a result.read more stands for payment. This indicates the amount which we will be adding to the annuity every period. If we omit to mention this value, then it is mandatory to mention PV.
- PV: PV stands for present value. This is the amount which we are investing in. As this amount is going out from our pocket, that is why by convention, this amount is mentioned with the negative sign.
- Type: This is an optional argument. We need to specify 0 if the amount is being added to the investment at the end of the period or one if the amount is being added to the investment at the beginning of the period.
We need to mention either the PMT or PV argument.
We will specify the rate as ‘Annual Interest Rate (B2)/ Compounding periods per year (B4)’.
We need to specify nper as ‘Term (Years) * Compounding periods per year.’
As we will not be adding any additional amount to the principal value in between the investment period, that is why we will specify ‘0’ for ‘pmt.’
As we have omitted the value for ‘pmt’ and we are investing Rs. 15000 as principal (present value), we will give reference of B1 cell with a negative sign for ‘PV.’
After pressing the Enter button, we get Rs. 15764.18 as the future value with compound interest.
Things to Remember about Compound Interest Formula in Excel
- We need to enter the interest rate in percentage form (4%) or in decimal form (0.04).
- As ‘PMT’ and ‘PV’ argument in FV function is outflows in real, we need to mention them in the negative form (with minus (-) sign).
- FV function gives #VALUE! Error when any non-numeric value is given as argument.
- We need to mention either PMT or PV argument in the FV function.
Recommended Articles
This has been a guide to Compound Interest Formula in Excel. Here we discuss how to use the Compound Interest formula in excel along with practical examples and a downloadable excel template. You may learn more about excel from the following articles –
- Formula of Monthly Compound Interest
- What is Quartile Formula?
- QUARTILE Function in Excel
- Excel NPER Function
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