Microsoft Office Tutorials and References

In Depth Information

Calculating interest with continuous compounding

The term
continuous compounding
refers to interest that is accumulated continuously. In other words, the in-

vestment has an infinite number of compounding periods per year. The following formula calculates the future

value of a $5,000 investment at 4.25% compounded continuously for three years:

=5000*EXP(4.25%*3)

The formula returns
$5,679.92,
which is an additional $0.04 compared with daily compounding.

You can calculate compound interest without using the FV function. The general for-

mula to calculate compound interest is

Principal*(1+Periodic Rate)^Number of Periods

For example, consider a five-year, $5,000 investment that earns an annual interest rate of 4%, compoun-

ded monthly. The formula to calculate the future value of this investment is

=5000*(1+4%/12)^(12*5)

Interest Rate

Rule of 72

Actual

1%

72.00

69.66

2%

36.00

35.00

3%

24.00

23.45

4%

18.00

17.67

5%

14.40

14.21

6%

12.00

11.90

7%

10.29

10.24

8%

9.00

9.01

9%

8.00

8.04

10%

7.20

7.27

15%

4.80

4.96

20%

3.60

3.80