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Calculate COMPOUND Interest

Calculate COMPOUND Interest

The compound interest function is especially important if you are thinking of making an investment and you need to forecast the interest rate on it. To calculate compound interest, follow the easy steps in this article carefully and you should have a result without any error message. 

Syntax

=FV(rate,nper,pmt,pv)

Explanation

Please note that the above formula is just a generic formula. To calculate compound interest, you will have to model this generic formula to suit the spreadsheet you are working on. The FV function could also be used as a tool to forecast future earning. Ever wanted to work on an investment and you are hesitant because you are not sure what will happen? The FV function would come in handy in these situations.

Example

Presently, let’s generate random data to show how calculating compound data works.

Step 1

Enter all the specified data. Here, we are preparing a spreadsheet for a future investment for the sum of $5,000

Figure 1. Excel spreadsheet for calculating compound interest.

Step 2

Enter “Future Monetary Value” in a separate cell. Here, we want to see what would be the future value of this sum in the next 4 years.

Figure 2. Create a cell for calculating the future monetary value.

Step 3 

Here, we are going to use the FV function to calculate the compound interest in the cell corresponding to “Future Monetary Value” to find out how much our initial sum, $5,000 will be in the next 4 years. Assign the formula to=FV(B2/B4, B3*B4, 0, -B1) cell B7.

Figure 3. Excel showing the calculated compound interest.

 

Notes on the use of FV function to calculate compound interest

  •        Make sure you follow the cell tag in the formula to avoid errors.
  •        Do not leave any space in between the formula as it could cause errors.

 

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