XL: How to Calculate Compound Interest (141695)


The information in this article applies to:

  • Microsoft Excel 2000
  • Microsoft Excel 2002
  • Microsoft Excel 97 for Windows
  • Microsoft Excel for Windows 95
  • Microsoft Excel for Windows 95 7.0a
This article was previously published under Q141695
For a Microsoft Excel 98 version of this article, see 191017.

SUMMARY

Compound interest is the amount that a dollar invested now will be worth in a given number of periods at a given compounded interest rate per period.

Although Microsoft Excel does not include a function for determining compound interest, you can use the following formula for this calculation

=PV*(1+R)^N

where PV is present value, R is the interest rate, and N is the number of investment periods.

MORE INFORMATION

Suppose you have $1,000.00 in an investment account. The account pays 8 percent interest and this interest is compounded annually. How much will the investment be worth at the end of three years? There are two ways to find the amount:
  • Use a Fixed Formula
  • Create a Function Macro to Determine Compound Interest

Use a Fixed Formula

The following formula typed into a cell on a worksheet, returns the correct value of $1,259.71:

=1000*(1+.08)^3

However, all of the information is 'hard-coded' into the formula and you must manually change the formula any time the figures change.

Create a Function Macro to Determine Compound Interest

Microsoft provides programming examples for illustration only, without warranty either expressed or implied. This includes, but is not limited to, the implied warranties of merchantability or fitness for a particular purpose. This article assumes that you are familiar with the programming language that is being demonstrated and with the tools that are used to create and to debug procedures. Microsoft support engineers can help explain the functionality of a particular procedure, but they will not modify these examples to provide added functionality or construct procedures to meet your specific requirements.
A custom function is more flexible because none of the actual raw data is 'hard-coded' into the function; the user just types the data for the calculation instead of the actual calculation. To create this custom function, follow these steps:
  1. Start Microsoft Excel.
  2. Press ALT+F11 to start the Visual Basic Editor.
  3. On the Insert menu, click Module.
  4. Type the following code in the new module:
    Function Yearly_Rate(PV As Double, R As Double, N As Double) As Double
 
    Yearly_Rate = PV*(1+R)^N    'Performs computation
 
End Function
To use the custom function, follow these steps:
  1. Type the following values in your worksheet: 
           Cell     Value
       --------------
       A1     1000.00
       A2         .08
       A3        3.00
    These values represent the following:

    • A1: Present value of the investment
    • A2: Interest rate
    • A3: Number of investment periods
  2. In any blank cell, type the following formula

    =Yearly_Rate(A1,A2,A3)

    where A1, A2, and A3 are the cells that contain the present value, interest rate, and number of investment periods respectively.
The cell in which you typed the formula displays $1,259.71. This is the amount your original investment of $1000.00 is worth after three investment periods at 8 percent compound interest.

REFERENCES

"Cost Accounting-A Managerial Approach," Charles T. Horgren, Prentice- Hall,Inc., Fourth Edition, pages 906-907
Modification Type:MinorLast Reviewed:8/17/2005
Keywords:kbhowto kbinfo KB141695
©2004 Microsoft Corporation. All rights reserved.