Interest Simple and Compound

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 Interest Simple and Compound
Article Index
Interest Simple and Compound
Present and future value
Compound interest
Financial functions
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.

## More Financial Functions:

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