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Compound Interest Formula (Table of Contents)
There are two types of interest one is simple interest and another one is compound interest. Compound interest is the type of interest calculated on the initial principal, including all of the interest accumulated in the prior periods of a loan or a deposit. The formula for computing Compound Interests is: Compound Interest = P * [(1 + i)n – 1] Where,
Examples of Compound Interest Formula (With Excel Template)Let’s take an example to understand the calculation of Compound Interest in a better manner. Example #1Mr. A has deposited 100,000 in the FD, where the bank pays 7%, which is compounded annually. Mr. A wants to calculate the compound interest that he would receive if he stays invested for 10 years. Solution: Compound Interest is calculated using the formula given below. Compound Interest = P * [(1 + i)n – 1]
Example #2Vardhan is looking to buy a new brand car on loan. The model which he liked will cost him the on-road price of 25,37,950.00. He can make an initial down payment of 10,00,000 and the rest of the amount he wants to be in the form of a loan. Bajaj finance is ready to provide him with a loan at a rate of interest of 11.88%, which shall be compounded monthly. Vardhan wants the loan period to be of 5 years as he would be receiving equivalent payments in the future. So, he asks the banker to keep OD (overdraft) only for 5 years. Vardhan has asked the banker to compute what excess amount he would be paying for the loan. You are required to calculate compound interest for 5 years. We are given all the variables here. P is 15,37,950 (25,37,950 -10,00,000), Rate of interest is 11.88% divided by 12 which is 0.0099 i.e 0.99%,, n is 5 and frequency is 12 as its annually. Related Courses Finance for Non Finance Managers Course (7 Courses)Investment Banking Course (123 Courses, 25+ Projects)Financial Modeling Course (7 Courses, 14 Projects) Solution: Compound Interest is calculated using the formula given below. Compound Interest = P * [(1 + i)n – 1]
The excess amount would be interested, and that would be around 12 lakhs as he is paying out a loan and principal payment only at the end of 5 years. Example #3Shankar is interested in a new investment product that Invest Corp has recently launched. The scheme asks to invest initially 50,000, and that will be matured after 15 years, and the guaranteed rate of interest will be 9.72% which is tax-free, and also it provides a bonus at the end of 15 years. Assume quarterly interest compound frequency. You are required to compute the total income earned in this product assuming Shankar decides to invest in the same, and at the end of 15 years, the bonus income is 10,783.90. We are given all the variables here: P is 50,000, Rate of interest is 9.72% divided by 4, which is 0.0243, i.e. 2.43%, n is 15, and frequency is 4 as its paying quarterly. Solution: Compound Interest is calculated using the formula given below. Compound Interest = P * [(1 + i)n – 1]
The income earned on this product will be 161,154.51 + 10,783.90, which is equal to 171,938.41. Explanation: To compute compound interest, we need to follow the below steps:
Relevance and Uses
Compound Interest Formula calculatorYou can use the following Compound Interest Calculator.
Recommended ArticlesThis is a guide to Compound Interest Formula. Here we discussed how to Calculate Compound Interest along with practical examples. We also have provided Compound Interest Calculator with a downloadable excel template. You may also look at the following articles to learn more –
How do I calculate monthly compound interest in Excel?A more efficient way of calculating compound interest in Excel is applying the general interest formula: FV = PV(1+r)n, where FV is future value, PV is present value, r is the interest rate per period, and n is the number of compounding periods.
How do you calculate compound interest with monthly contributions?The monthly compound interest formula is used to find the compound interest per month. The formula of monthly compound interest is: CI = P(1 + (r/12) )12t - P where, P is the principal amount, r is the interest rate in decimal form, and t is the time.
How do I calculate compound interest for recurring deposit in Excel?= FV(Rate,Nper,Pmt,Pv,Type)
Modified Rate of Interest: The interest rate in Recurring Deposits (in this case case of 8.75%) is compounded on quarterly basis. Whereas FV is calculated on monthly basis because we are making monthly deposits.So we cannot directly put the standard bank rate into the above formula.
How do you calculate monthly compounded monthly?Monthly compounding is calculated by the principal amount multiplied by one plus the rate of interest divided by several periods whole rises to the power of the number of periods. That whole is subtracted from the principal amount, which gives the interest amount.
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