Compound Interest in Excel Formula

Compound interest is the addition of interest to the principal sum of a loan or deposit or interest on interest. Rather than paying it out, it is the outcome of reinvesting interest so that interest in the next period is earned on the principal sum plus previously accumulated interest.

For example, suppose you invested $5,000 with a 10% annual interest rate and annually compounded. In such a situation, you may earn $500 ($5,000×10%) as interest from the initial investment(principal). Therefore, from the initial investment, you may earn $5,000+$500= $5,500. Then, in the next period, you may make interest based on the gross amount from the last period. In this example, after two years, from the initial investment, you may earn $550 ($5,500×10%) as your first investment was $5,500. Now, your investment worth will be $5,550.

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 sumP’ is the new principal sumn is the compounding frequencyr is the nominal annual interest ratet is the overall length of time the interest is applied (expressed using the same time units as r, usually years).

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How to Calculate Compound Interest in Excel Formula? (with Examples)

Let us understand the same using some examples of the Compound InterestExamples Of The Compound InterestTo calculate the compound interest in excel, the user can use the FV function and return the future value of an investment. To configure the function, the user must enter a rate, periods (time), the periodic payment, the present value. Compound interest formula = FV(rate,nper,pmt,pv)read more formula in excel.

Example #1 – Using Mathematical Compound Interest Excel Formula

Suppose we have the following information to calculate compound interest in Excel.

It is like a compound interest calculator in Excel now. We can change the value for the annual interest rate, the number of years, and compounding periods per year as below.

  • 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. The interest is to be compounded quarterly (C5), so we need to divide the annual interest rate with cell C5. As interest is being compounded four times in a year, we need to reference a cell where the number of years is mentioned to multiply 4 with the number of years. That is why the formula would be like this: After pressing the “Enter” button, we will get ₹15764.18 as the future value with compound interest.

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 the “Name Box.“

Step 2 – We have the principal value or present value as ₹15,000, and the annual interest rate is 5%. To calculate the investment value 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 need to drag the formula to the C6 cell by selecting the range C3: C6 and pressing “Ctrl+D.”

The future value after four quarters will be ₹15764.18.

Example #3 – Compound Interest Using FVSCHEDULE Excel Formula

We will use the FVSCHEDULE function to calculate future valueCalculate Future ValueThe Future Value (FV) formula is a financial terminology used to calculate cash flow value at a futuristic date compared to the original receipt. The objective of the FV equation is to determine the future value of a prospective investment and whether the returns yield sufficient returns to factor in the time value of money.read more. 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.

  • We need to give the amount we are investing in for the principal.We need to provide the list of interest rates with commas in curly braces for the schedule to calculate the value with compound interestCompound InterestCompound interest is the interest charged on the sum of the principal amount and the total interest amassed on it so far. It plays a crucial role in generating higher rewards from an investment.read more.

Step 2 – For ‘principal,’ we will provide the reference of the B1 cell, and for ‘schedule,’ we will specify 0.0125 as this is the value we get when we divide the 5% with 4.

Now, we can apply the FVSCHEDULE formula in Excel.

Step 3 – After pressing the Enter button, we get ₹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. It indicates the amount we will add to the annuity every period. If we omit this value, then it is mandatory to mention PV.PV: PV stands for present value. It is the amount which we are investing in. As this amount is going out of 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 between the investment period, we will specify ‘0’ for “pmt.“

We have omitted the value for “pmt,“ and we are investing ₹15,000 as principal (present value). We will give a reference of B1 cell with a negative sign for “PV.”

After pressing the “Enter” button, we get ₹15764.18 as the future value with compound interest.

Things to Remember about Compound Interest Formula in Excel

  • We need to insert the interest rate in percentage form (4%) or decimal form (0.04).As the “PMT” and “PV” arguments in the FV function outflows, in reality, we need to mention them in the negative form (with a minus (-) sign).FV function gives #VALUE! Error when any non-numeric value is provided as an argument.We need to mention either PMT or PV arguments in the FV function.

This article is a guide to Compound Interest Formula in Excel. We discuss using the compound interest formula in Excel, practical examples, and a downloadable Excel template. You may learn more about Excel from the following articles: –

  • Formula of Monthly Compound InterestWhat is Quartile Formula?QUARTILE Function in ExcelExcel NPER Function