Excel allows a user to calculate the compound interest of an investment using the FV function. This step by step tutorial will assist all levels of Excel users in calculating the compound interest of an investment.
Figure 1. The result of the FV function
Syntax of the FV Formula
The generic formula for the FV function is:
=FV (rate, nper, pmt, [pv], [type])
The parameters of the FV function are:
- rate – an interest rate for the period (the annual rate divided by 12)
- nper – the total number of periods of an investment
- pmt – payment per period
- [pv] – the present value of a loan and must be negative. This is an optional parameter. If it’s omitted, the default value is 0
- [type] – specifies when the payments are made: at the end of a period (0) or at the beginning of a period (1). By default, it’s 0.
Setting up Our Data for the FV Function
Let’s look at the structure of the data we will use. In the cell C2, we have the annual interest rate for the loan. In the cell C3 is the number of periods for the investment. In the C4 is the present value of the loan. We want to get the result of the FV function in the cell E3.
Figure 2. Data that we will use in the FV example
Calculate the Compound Interest of the Investment
In our example, we want to calculate the compound interest of the investment in the cell E3. The interest rate is 6.50%, the total number of periods is 60 and the present value of the investment is $5,000.
The formula looks like:
=FV(C2/12, C3, 0, -C4)
The parameter rate is C2/12, as we must pass the monthly interest rate to the function. The nper parameter is C3 (60) and the pmt is 0. The pv is in the C4 ($5,000), with the minus.
To apply the FV function, we need to follow these steps:
- Select cell E3 and click on it
- Insert the formula:
=FV(C2/12, C3, 0, -C4) - Press enter
Figure 3. Using the FV function to calculate the compound interest of the investment
Finally, the result in the cell E3 is $6,914, which is the compound interest of the investment of $5,000 in 60 months with the annual interest rate of 6,50%.
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