Calculating Compound Interest
Every loan you borrow from the bank comes with an interest, on top of your loan’s principal amount. To know how to compute for the interest rate of your loan through the years will enable you to make a smart financial plan, helping you settle your loans without payment delays. In today’s age of computing, one needs to know the basics of calculating compound interest in spreadsheet software like MS Excel. When calculating compound interest, it is important to know basic concepts behind this type of interest rate.
What is a Compound Interest?
Compound interest is the amount you pay on the initial amount of your loan, plus, the accumulated rate on the loan’s principal amount. In terms of investment, compound interest is the rate of dollar put into investment, which will yield an interest rate over a given period of time. In loans, calculating compound interest rate means paying more interest rate while calculating compound interest in deposits means your money earning more than the usual interest rate.
Here are Two Scenarios for Calculating Compound Interest Rate
A. Calculating Compound Interest on Loans
It is important to compare the interest rates of an annual and quarterly payment of your loan. For example, the annual rate may be 6 percent and the compounded quarterly interest rate is at 5.9 percent. The latter seems to give you a cheaper interest rate, but it will not save you more to go for an annual payment. This is because it will mean a compounded interest rate of 5.9 percent, added four times in a year, which will give you a total compound interest rate of 6.03 percent.
B. Calculating Compound Interest on Savings
For example, you have a deposit of $1,000 in the bank. If the account gives you an 8 percent interest rate which is compounded in a year, in three years time, your investment will amount to $1,259.71. The annual rate is solved using the formula for a yearly compound interest rate.
Formula on Calculating Compound Interest on Savings and Loans
Yearly: P x ( 1 + r )n
Quarterly: P( 1 + r/4 ) 4
Monthly: P ( 1 + 2/12 )12
Where,
P = principal amount of the loan borrowed or saved
r = yearly percentage rate
n = number of years when the money is invested or borrowed
The total amount of accumulated compound interest rate is often represented by A, as in:
A = P ( 1 + r )n
If you are using Excel for calculating compound interest rate, remember that it is more flexible to use the custom function, instead of hard-coding the formula itself. Here, you can type the data itself, than do the actual computation. To do this, you can open Microsoft Excel and press ALT + F11. It will open the Visual Basic Editor. Go to the Insert menu and click on Module. You can then type the formula and custom values which will automatically give you the rate of your compound interest. This is done by people who are adept at using the spreadsheet program. For starters, there are many free online compound interest rate calculator that you can use. Just fill in the figures requested for. automatic calculation You may also get in touch with your bank and ask for help.
RESOURCES:
Microsoft. “ How to Calculate Compound Interest. “ 2009.
http://support.microsoft.com/?kbid=141695
Investopedia ULC. “ Compound Interest. “ 2009.
http://www.investopedia.com/terms/c/compoundinterest.asp?&viewed=1
Excel Experts.com. “ Excel for Finance Tips: Calculate Compound Interest. “ March 2009.
http://excelexperts.com/Excel-For-Finance-Tips-Calculate-Compound-Interest
Russell, Deb. “ Compound Interest: A Review. “ 2009. About.com.
http://math.about.com/library/weekly/aa042002a.htm
