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Page 8 of 8
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:
<ASIN:0470031573>
<ASIN:0127708510>
<ASIN:0470242051>
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