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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.
More Financial Functions:
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<ASIN:0127708510>
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