# Compound Interest Formula

Compound interest formula. How to Calculate Compound Interest? Here’s the fastest way.

## What is Compound Interest

Compound interest simply means to earn interest on interest. If you were to start off with \$100 and receive an interest of 10% per month, after the first month you would have \$110, after the second month you would have \$121, after the third month you would have \$133.10. As you can see, your money increases at an accelerating rate as you earn interest on interest; that is what is meant by the power of compound interest.

## How to calculate Compound Interest

You need three numbers in order to calculate compound interest:

1. Principal = the original amount of money invested
2. Rate of interest = the periodic interest received
3. Time period = time period over which interest is allowed to accumulate

## Compound Interest Equations

Here’s the compound interest equation for compound interest calculation:

### Formula for Calculating Compound Interest

Compound Interest = Principal x ((1 + Rate of Interest) to the power of the Number of Time periods)

## Compound Interest Example

Suppose you invest \$10,000 in a ten-year fixed deposit savings account at an annual interest rate of 3%. How much would you have accumulated by the end of the ten years?

## How to Compute Compound Interest

Let’s compute the compound interest in this example. Using the compound interest formula, we have the following:

1. Principal = \$10,000
2. Rate of Interest = 3% per annum
3. Time period = 10 years

### Figuring Compound Interest

Compound Interest = 10,000 x (1.03 ^ 10) = \$13439.16

Thus, the compound interest earned in total is \$13439.16 – a return of 34% over ten years.

## Discounting

Discounting is the opposite of compound interest. This is a way for you to calculate the present value of a sum of money to be received in the future. For example, if you were to receive \$100 ten years later, that might only equate to a present value of \$88 after we consider the effects of inflation and other factors.

## Discounting Formula

Present value = Future Value x ((1 – Discount rate) to the power of the Number of time periods)

In bond investing, the discount rate usually refers to the price of a bond including accrued interest. This is sometimes also known as the ‘dirty price’.

## Calculate Compound Interest in Excel

Using the same example as above, it is easy to use Excel to calculate compound interest.

## Computing Compound Interest

The formula will then become =10000*POWER(1.03,10)

The first argument in the POWER function is the Interest Rate + 1, the second is the number of periods over which the interest is to be calculated in Excel.