Microsoft Office Tutorials and References

In Depth Information

If the investment term is less than one year, the simple interest rate is adjusted accordingly, based on the term.

For example, $1,000 invested in a six-month CD that pays 3% simple annual interest earns $15.00 when the CD

matures. In this case, the annual interest rate multiplies by six-twelfths.

Figure 11-7 shows a worksheet set up to make simple interest calculations. The formula in cell B7, shown here,

calculates the interest due at the end of the term:

=B3*B4*B5

The formula in B8 simply adds the interest to the original investment amount.

Figure 11-7:
This worksheet calculates simple interest payments.

Calculating compound interest

Most fixed-term investments pay interest by using some type of compound interest calculation.
Compound in-

terest
refers to interest credited to the investment balance, and the investment then earns interest on the interest.

For example, suppose that you deposit $1,000 into a bank CD that pays 3% annual interest rate, compounded

monthly. Each month, the interest is calculated on the balance, and that amount is credited to your account. The

next month's interest calculation will be based on a higher amount because it also includes the previous month's

interest payment. One way to calculate the final investment amount involves a series of formulas (see Figure

11-8).

Column B contains formulas to calculate the interest for one month. For example, the formula in B10 is

=C9*($B$5*(1/12))

The formulas in column C simply add the monthly interest amount to the balance. For example, the formula in

C10 is