126

Compounding Quarterly, Monthly, and Daily

So far, you have been compounding interest annually, which means the interest is added once per
year. However, you will want to add the interest quarterly, monthly, or daily in some cases.
Excel will allow you to make these calculations by adjusting the interest rate and the number of
periods to be compounded. Remember that all interest rates provided in the problems are
annual rates. You must adjust them to fit other compounding periods. The adjusted rate is
called the periodic rate. To adjust the periodic rate in Excel, open the FV calculation box and
change a 10% annual rate to quarterly, monthly, or daily as follows:

• Quarterly Rate: .10/4 Changing the rate to 2.5% or .025

• Monthly Rate: .10/12 Changing the rate to .83% or .0083
• Daily Rate: .10/365 Changing the rate to .0274% or .000274

Change ten years of compounding to quarterly, monthly, or daily as follows:

• Quarerly Nper: 10*4 Changing the compounding periods to 40

• Monthly Nper: 10*12 Changing the compounding periods to 120
• Daily Nper: 10*365 Changing the compounding periods to 3,650

If you assume you put $50 into savings and you are comparing savings accounts where the 10%
annual interest rate is compounding quarterly, monthly, or daily. You can compare the amount
of interest you will earn using Excel as follows:

Quarterly Monthly Daily

Rate: .1/4 or .025 Rate: .1/12 or .00833 Rate: .1/365or .000274
Nper: 10*4 or 40 Nper: 10*12 or 120 Nper: 10*365 or 3650
Pmt: 0 Pmt: 0 Pmt: 0
Pv: -50 Pv: -50 Pv: -50

Future Value = $134.25 Future Value = $135.35 Future Value = $135.90

The more frequently interest is added to your savings and compounded, the more interest
you will earn. The above illustration involves a small amount of savings. The more the savings
and the more often you add to your savings the more difference it will make when the interest in
added and compounded more frequently. The following example illustrates saving $100 per
month for ten years at 10% interest rate compounded monthly versus annually.

Annually Monthly
Rate: .1 or 10% Rate: .1/12 or .00833
Nper: 10 Nper: 10*12
Pmt: -1200 Pmt: -100
Pv: 0 Pv: 0

Future Value = $19,124.91 Future Value = $20,484.50

Section 3.3
 127

Savings Plan Formula for a lump sum

𝒓 𝒏𝒀 A = Final Amount
𝑨=𝑷 𝟏+ PMT = monthly payment
𝒏
P = Principal amount
(beginning balance)
Savings Plan Formula with payment r = annual interest rate
𝒓 𝒏𝒀 n = number of compounding
𝟏+𝒏 −𝟏 per year
𝑨 = 𝑷𝑴𝑻 𝒓 Y = number of years
𝒏
So,
𝐫
𝐧
= periodic interest rate (rate
Thus we have the monster formula for a Savings Plan that
used in spreadsheet)
begins with a balance and then is added to by a payment:
nY = number of periods (nper)
𝒓 𝒏𝒀
𝒓 𝒏𝒀 𝟏+𝒏 −𝟏
𝑨=𝑷 𝟏+ + 𝑷𝑴𝑻 𝒓
𝒏
𝒏

Spreadsheets normally have this formula built into their functions. It is known as Future Value
(FV), so you won’t need to use this one if you learn the spreadsheet well.

Loan Payment Formula

𝒓
𝑷𝑴𝑻 = 𝑷 𝒏
𝒓 !𝒏𝒀
𝟏− 𝟏+𝒏

Spreadsheets also normally have this formula built into their functions. It is known as Payment
(PMT).

Final note using a spreadsheet: The formulas are built so that money going out from you is
negative and money coming in to you is positive. When you are entering Savings into the
spreadsheet, the payment and Principal (Present Value) will be negative. However, for a loan, the
payment will be negative but the Principal (Present Value) will be positive, because it represents
money coming to you.

Section 3.3
 128

Calculating Payments, Interest Rates, and Number of Periods

Excel will help you calculate the payment you will need to make on a loan. It will calculate the
interest rate you would need to earn on your savings to realize a certain future balance. The
number of periods it will take to have your savings grow to a certain future balance can also be
determined.

Monthly Payment Calculation

If you wanted to buy a car that costs $15,000 and you can get a loan at 6% interest for
four years, you can determine the monthly payments using the PMT Excel function as
follows:

Rate: .06/12 or .005 (monthly interest)

Nper: 4*12 or 48 (months)
Pv: -15000
Fv: 0
Monthly Payment = $352.28

When you have paid the monthly payment for forty-eight months you will own the car
and the future value of the loan is zero because the loan in paid off.

Benefits Versus Bondage

You can see how hard your savings will work for you given an interest rate and enough time.
However, interest works against you when you borrow money. The benefits may seem great at
the moment but the financial bondage is terrible. By calculating the interest you would pay on a
loan to borrow a car and the interest you would earn by saving to be able to pay cash for the car,
we can determine the financial advantage of collecting interest rather than paying interest.

Interest Paid on a Car Loan

You calculate the amount of interest you would pay on a four year car loan of $15,000 at
6% annual interest using the Excel Pmt function as follows:

Rate: .06/12
Nper: 4*12
Pv: -15000
Fv: 0
Monthly Payment = $352.28
Total Payment = $352.28*48 (Payments) = $16,909.22
Interest Paid =$16,909.22 (Paid) -$15,000 (Borrowed) = $1,909.22

Section 3.3
 129

TIP: You can have Excel calculate this for you by entering the Pmt function to calculate
the monthly payment and then, on the formula bar at the top of the Excel sheet, multiply
by 48 payments and subtract the $15,000 you borrowed. The formula will be as follows:

=PMT(0.06/12,4*12,-15000,0)*48-15000

You can also double click on the cell with the Pmt calculation in it and the formula will
appear in the cell. Now you can multiply by 48 payments and subtract 15000 and enter
this formula in the cell. The cell will have the answer and the formula will be in the
formula bar.

Interest Collected on Your Savings

The interest you will earn on your savings of $350.00 per month earning 6% annual
interest for 39 months (the number of months we calculated above would be required to
accumulate $15,000 in savings) is calculated using the FV function in Excel as follows:

Rate: .06/12
Nper: 39
Pmt: -350
Pv: 0
FV = $15,030.44
Amount Deposited in Savings = $350*39 (deposits) = $13,650.00
Interest Earned on Savings = $15,030.44-$13,650.00 = $1,380.44

Again, you can double click on the cell containing the FV calculation and subtract
350*39 and enter this formula giving you the amount of interest earned. You can make
the same adjustment to the formula in the formula bar. The resulting formula is as
follows:

=FV(0.06/12,39,-350)-350*39

Total Savings From Saving Versus Borrowing

Here is how you benefited by saving and paying cash for the car rather than borrowing
the money to buy the car:

Interest Earned $1,380.44

Interest Not Paid $1,909.22
Financial Advantage $3,289.66

You are wealthier by $3,289.66 because you collected interest rather than paying interest.
This practice will make a major difference in your financial well being throughout your
life. If you put the money you save by paying cash for major purchases to work for you
by investing it for your retirement you will add greatly to your independent wealth. You

Section 3.3
 130

can estimate that using the FV function in Excel as follows assuming a 6% return on your
investment for 30 years:

Rate: .06
Nper 30
Pv: -3289.66
FV = $18,894.13

This addition to your wealth along with the other additions resulting from saving rather
than borrowing will make a major impact on your ultimate wealth.

TIP: In all of the Excel functions you will be using, you only need three entries or factors to
calculate the fourth factor you are after. Notice that there are only three entries in each of the
above Excel functions. You can leave blank any factor not needed and Excel will assume it is
zero.

Section 3.3
 131

Section 3.3 Exercises Part B

Simplify the following.
1. (3m2)3(2m2)3 2. (x7x11)3

3. !!!" !!! 4. t8m5t5m3

!! ! !
5. 2-4 6. 3x7 (4x2 – 5x +3)

7. !"!! !!! 8. !
!"! !
!!!! !! !"! !"

9. (5p-5g8)-2 10. !"! !! ! !

!!

!"! ! ! !!

11. !"! !! ! !
!! 12. 5x5 (4x7 – 7x6 + 5x-2)
!"! ! ! !

13. Why doesn’t a negative exponent make the answer negative?

Using your calculator and the Savings Plan formulas, fill out the table for a savings account.
14. Simple n = 1 15. Quarterly n = 4 16. Monthly n = 12 17. Daily n = 365
P = 200 P = 200 P = 200 P = 200
r = 8% r = 8% r = 8% r = 8%
Y = 15 Y = 15 Y = 15 Y = 15
A= A= A= A=

Using your calculator and the Savings Plan formulas, fill out the table for a savings account.
18. Simple n = 1 19. Quarterly n = 4 20. Monthly n = 12 21. Daily n = 365
P = 300 P = 300 P = 300 P = 300
r = 7% r = 7% r = 7% r = 7%
Y = 15 Y = 15 Y = 15 Y = 15
A= A= A= A=

Using a spreadsheet and the Future Value (FV) formula, fill out the table for a savings account.
Put your results in a spreadsheet called “Savings and Loan Practice.”
22. Simple n = 1 23. Quarterly n = 4 24. Monthly n = 12 25. Daily n = 365
P = 200 P = 200 P = 200 P = 200
r = 7% r = 7% r = 7% r = 7%
Y = 15 Y = 15 Y = 15 Y = 15
A= A= A= A=

Assignment 3.3b
 132

Using a spreadsheet and the Future Value (FV) formula, fill out the table for a savings account.
Put your results in a spreadsheet called “Savings and Loan Practice.”
26. Simple n = 1 27. Quarterly n = 4 28. Monthly n = 12 29. Daily n = 365
P = 300 P = 300 P = 300 P = 300
r = 8% r = 8% r = 8% r = 8%
Y = 15 Y = 15 Y = 15 Y = 15
A= A= A= A=

Using your calculator, find the monthly (n = 12) payment for the following loans.
30. 31. 32. 33.
P = 300 P = 3000 P = 1500 P = 23,000
r = 8% r = 9% r = 15% r = 8%
Y=2 Y=5 Y = 12 Y = 30
PMT = PMT = PMT= PMT =

Using a spreadsheet and the Payment (PMT) formula, find the monthly (n = 12) payment for the
following loans. Put your results in a spreadsheet called “Savings and Loan Practice.”
34. 35. 36. 37.
P = 300 P = 3000 P = 1500 P = 23,000
r = 8% r = 9% r = 15% r = 8%
Y=2 Y=5 Y = 12 Y = 30
PMT = PMT = PMT= PMT =

Using a spreadsheet and the Payment (PMT) formula, find the monthly (n = 12) payment for the
following loans. Put your results in a spreadsheet called “Savings and Loan Practice.”
38. 39. 40. 41.
P = 500 P = 4800 P = 2500 P = 23,000
r = 4% r = 9% r = 15% r = 8%
Y=2 Y=5 Y = 12 Y = 20
PMT = PMT = PMT= PMT =

42. Ensure that every member of the group is able to put in the formulas and use the
spreadsheet to do the calculations. (You will NOT submit a copy of your spreadsheet to
answer this question. This question is complete and correct when every student is able to put
in the formulas and use the spreadsheet to do the calculations.)

Assignment 3.3b
 133

Answers:
1. 216m12 28. 992.08
54
2. x 29. 995.90
3. !!! 30. 13.57
!!!
4. t13m8 31. 62.28
! 22.51
5. 32.
!"
6. 12x9 – 15x8 + 9x7 33. 168.77
7. !!! 34. 13.57
!!
8. 1 35. 62.28
9. !!" 36. 22.51
!"!!"
10. !!!"
!"!!"
37. 168.77
!"!!!" !!"
11.
!"
38. 21.71
12. 20x12 – 35x11 + 25x3 39. 99.64
13. Negative exponents mean 37.52
division 40.
14. 634.43 41. 192.38
15. 656.21 42. Complete only when everyone understands
and can enter the formulas on their own.
16. 661.38
17. 663.94
18. 827.71
19. 849.54
20. 854.68
21. 857.21
22. 551.81
23. 566.36
24. 569.79
25. 571.47
26. 951.65
27. 984.31

Assignment 3.3b