Excel 2010 Bible

Chapter 15: Creating Formulas for Financial Applications

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FIGURE 15.13

Calculating interest by using daily compounding.

Note
You can calculate compound interest without using the FV function. The general formula to calculate com-
pound 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 percent, com-
pounded monthly. The formula to calculate the future value of this investment is

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

Need to make an investment decision, but don’t have a computer handy? You can use the Rule of 72 to

determine the number of years required to double your money at a particular interest rate, using annual

compounding. Just divide 72 by the interest rate. For example, consider a $10,000 investment at 4

percent interest. How many years will it take to turn that 10 grand into 20 grand? Take 72, divide it by

4, and you get 18 years. What if you can get a 5 percent interest rate? If so, you can double your money

in a little over 14 years.

How accurate is the Rule of 72? The table that follows shows Rule of 72 estimated values versus the

actual values for various interest rates. As you can see, this simple rule is remarkably accurate. However,

for interest rates that exceed 30 percent, the accuracy drops off considerably.

continued

The Rule of 72