**Using Excel to Compute
Compound Interest**

*by Kristina Dunbar,
UGA*

**The formula for
compound interest is**

*P = A(1 + i) ^{t}*

**where **
**A****
is the initial amount, i
is the interest rate per compounding
period, and t
is the number of periods the amount is compounded for. **

**We can use Microsoft
Excel to explore this problem.**

**
**

**Let's Invest Some
Money!**

__Question:__
With an initial investment of $5000, how much money would we have after 1 year
if we had an annual interest rate of 3% compounded annually? Quarterly?
Monthly? How much after 2 years? 10 years?

**We have created a
spreadsheet to solve this problem.**

**
**

**These are the
equations we used:**

**Column D (cell D2):
P = 5000(1 + .03) ^{A2}**

**Column E (cell E2):
P = 5000(1 + .0075) ^{A2*4}**

**Column F (cell F2):
P = 5000(1 + .0025) ^{A2*12}**

**You can see that after
50 years, with no further investment, you will have $21,919.53 to $22,366.54 in
the bank, depending on how the interest is compounded. Three percent
interest is actually a very good interest rate to get for an investment, most
banks offer around 2% annual interest rate.**

**
**

**Watch out for Credit
Card Debt!**

**We have looked at the
problem above where we had a $5,000 investment that received an annual interest
rate of 3%. But what if that $5,000 were a debt?**

**Most credit card
companies charge anywhere from 10% to 22.5% interest. The below
spreadsheet shows how much debt you would accumulate if you accrued $5,000 debt
with a 20% annual interest rate without making any payments. **

**
**

**These are the
equations we used:**

**Column D (cell D2):
P = 5000(1 + .20) ^{A2}**

**Column E (cell E2):
P = 5000(1 + .05) ^{A2*4}**

**Column F (cell F2):
P = 5000(1 + .01667) ^{A2*12}**

**Credit card companies
compound interest on a monthly basis. Just think, after only one year, you
will owe $6,099.35, which is $1,099.35 more than you borrowed. In 30
years, that $5,000 debt will be almost two million dollars! **

**Lesson: Pay off
your credit cards!**

**If you would like
to see the Excel file used to create the above data, click
here.**