Microsoft Office

Part II
Working with Formulas and Functions
Cell B9 contains the following formula that calculates the periodic interest rate. This value is the interest
rate used for each compounding period.
=B5*(1/B6)
The formula in cell B10 uses the FV function to calculate the value of the investment at the end of the term.
The formula is
=FV(B9,B6*B7,,-B4)
The first argument for the FV function is the periodic interest rate, which is calculated in cell B9. The second
argument represents the total number of compounding periods. The third argument (pmt) is omitted,
and the fourth argument is the original investment amount (expressed as a negative value).
The total interest is calculated with a simple formula in cell B11:
=B10-B4
Another formula, in cell B13, calculates the annual yield on the investment:
=(B11/B4)/B7
For example, suppose that you deposit $5,000 into a three-year CD with a 5.75 percent annual interest rate
compounded quarterly. In this case, the investment has four compounding periods per year, so you enter 4
into cell B6. The term is three years, so you enter 3 into cell B7. The formula in B10 returns $5,934.07.
Perhaps you want to see how this rate stacks up against a competitor’s account that offers daily compounding.
Figure 16.13 shows a calculation with daily compounding, using a $5,000 investment (compare this to
Figure 16.12). As you can see, the difference is very small ($934.07 versus. $941.28). Over a period of
three years, the account with daily compounding earns a total of $7.21 more interest. In terms of annual
yield, quarterly compounding earns 6.23%, and daily compounding earns 6.28%.
FIGURE 16.13
Calculating interest by using daily compounding.
306