Interest Simple and Compound
Article Index
Interest Simple and Compound
Present and future value
Compound interest
Financial functions
An investment/loan spreadsheet
Inflation
Inflation and interest
Summary and key points

Formula summary

This chapter has introduced a number of formulas to calculate simple and compound interest.

The following tables gives the formulas and functions that provide the relationships between the sum invested,PV; the future return, FV; the rate of interest I%, over n, the number of compounding periods.


To calculate
Formula Spreadsheet Function
Simple interest
FV
(Return)
= PV*(1+n*I) N/A
I%
(Rate)
=((FV/PV)-1)/n N/A
n
periods
=((FV/PV)-1)/I N/A

PV
(Investment)

=FV/(1+n*I) N/A

Compound interest
FV
(Return)

=PV*(1+I)^n

=FV(I,n,0,-PV)

I%
(Rate)

=(FV/PV)^(1/n)-1

=RATE(n,0,-PV,FV)

n

periods

=ln(FV/PV)/ln(1+I) =NPER(I,0,-PV,FV)

PV

(Investment)

=FV*(1+I)^-n =PV(I,n,0,FV)

 

Key points

  • Interest is a percentage rate and its specification involves a percentage and a time period.
  • Simple interest is where the interest earned or owed is not added to the sum invested or borrowed and so doesn’t affect the period interest calculation.
  • For simple interest FV=PV*(1+n*I%) where FV is the Future Value, PV is the Present value, I% the interest rate and n is the number of interest bearing periods.
  • To convert from an annual rate of interest to a monthly rate simply divide by 12. Conversions between rates over other periods follow a similar method.
  • Compound interest is where the interest earned or owed is added to the sum invested or borrowed and so does affect the subsequent interest calculations.
  • Spreadsheets have a range of financial functions which can be used to simplify the raw formulas involved in interest calculations.
  • Inflation is an application of compound interest that reduces rather than increases the value of money.

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More Financial Functions:

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<ASIN:0470242051>



 
 

   
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