Nick's Excel For Finance Tip Of The Day
This is my Excel for Finance Tip of the day blog. If you want to know how to calculate compound interest in excel, about discount factors, or even convert from simple interest to compound interest, this is the place for you.
| Attachment | Size |
|---|---|
| discount-factor.xls | 28 KB |
| leverage-excel.xls | 18 KB |
| Calculate-Compound-Interest-in-Excel.xls | 20.5 KB |
| continuous-compounding-In-Excel.xls | 20 KB |
| Future-Value.xls | 19.5 KB |
| basis-point.xls | 18.5 KB |
| IRR-excel.xls | 19.5 KB |
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1. Excel For Finance Tip Of The Day- Calculate Compound Interest
The very first tip is also the basis of finance
- how to Calculate Compound Interest in Excel.
When comparing interest rates for loans or investments, it is important to compare them on an equal basis.
Loan 1: 6% per year.
Loan 2. 5.9% per year compounded quarterly
Which loan is cheaper ? It looks like Loan 2. Well, it turns out that loan 1 is in fact cheaper due to the quarterly compounding effect of loan 2. Every quarter, 5.9%/4 (4 times a year) is added onto the loan amount. The compounding effect of this means that the annual equivalent rate is 6.03% which is higher than Loan 1 (annual 6%).
Download my spreadsheet on how to calculate annual equivalent rates for the 2 loans, and find out which one is cheaper.
The conclusion is that the compounding effect doesn't make an enormous difference - in this case 0.14%.. However, if the loan is 100,000, the annual repayment difference is 140 between the same rate quoted annually and quarterly. Better to have that 140 in your pocket than giving it away !
Training Video on how to Calculate Compound Interest in Excel: