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RATE: Discovering the interest rate of an annuity

From: Excel 2010: Financial Functions in Depth

Video: RATE: Discovering the interest rate of an annuity

When you evaluate any investment opportunity, most of the time the first thing you want to know is the interest rate. However, there are some investments that are presented to you without that information. What they tell you are the number of periods, the payment each period, the present value, in other words the amount you're borrowing and so on, but they don't tell you the interest rate. However, if you want to find that interest rate using Excel, you can do so using the RATE function. The RATE function has three required arguments and three optional arguments.

RATE: Discovering the interest rate of an annuity

When you evaluate any investment opportunity, most of the time the first thing you want to know is the interest rate. However, there are some investments that are presented to you without that information. What they tell you are the number of periods, the payment each period, the present value, in other words the amount you're borrowing and so on, but they don't tell you the interest rate. However, if you want to find that interest rate using Excel, you can do so using the RATE function. The RATE function has three required arguments and three optional arguments.

I've listed them here in this worksheet. The first required argument is the number of periods and that is simply the number of payments that you're going to have to make. In this case it's monthly. So it's a period of five years multiplied by 12 months per year, and then the payment per period and that is expressed as a negative number because it is an outflow from your account. Next is the present value and that's basically the amount that you're borrowing. In this case it's $45,000. Then we get to the three optional arguments. The first one is the future value which is zero and this is how the accounting format displays a zero.

Type can be one of two values. It can either be zero, in which case you're making your payment at the end of an accounting period, in this case a month, or 1 which means that you're making your payment at the beginning. Both future value and the type, if you don't include them in the function, are assumed to be zero. And then finally you have guess, and this is your guess at the interest rate. If you don't put in a value then Excel uses a value of 10%. So I put in 10%, which is the default just for explanatory purposes.

Okay, so let's go ahead and create the formula. So we'll type =RATE( and then the first argument is the number of periods and that is in cell C3, type a comma, then the payment which is in C4, and again that is a negative number because it's an outflow from your account, comma, and then the present value, the amount you're borrowing, and that is in cell C5, and then we get to the optional arguments which are indicated in the formula tooltip by enclosing them in square brackets.

So we have C5 and then the future value's in C6. We're paying it down to zero. Then we have the type which is when we make our payment and that is going to be in cell C7, and then our guess which in cell C8. So type a right parenthesis, make sure all the arguments are good, and press the Tab key. When we do, we see that the rate is about 1%. If you're ever faced with an investment where you don't know the interest rate but you have this other information, you can use the RATE function to discover it very quickly.

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Excel 2010: Financial Functions in Depth

52 video lessons · 13669 viewers

Curt Frye
Author

 
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  1. 2m 11s
    1. Welcome
      1m 6s
    2. Using the exercise files
      36s
    3. Disclaimer
      29s
  2. 28m 32s
    1. PMT: Calculating a loan payment
      3m 31s
    2. PPMT and IPMT: Calculating principal and interest per loan payment
      4m 18s
    3. CUMPRINC and CUMIPMT: Calculating cumulative principal and interest paid between periods
      4m 30s
    4. ISPMT: Calculating interest paid during a specific period
      2m 13s
    5. EFFECT and NOMINAL: Finding nominal and effective interest rates
      3m 31s
    6. ACCRINT and ACCRINTM: Calculating accrued interest for investments
      4m 15s
    7. RATE: Discovering the interest rate of an annuity
      2m 41s
    8. NPER: Calculating the number of periods in an investment
      3m 33s
  3. 19m 5s
    1. SLN: Calculating depreciation using the straight-line method
      1m 48s
    2. DB: Calculating depreciation using the declining balance method
      3m 10s
    3. DDB: Calculating depreciation using the double-declining balance method
      3m 20s
    4. SYD: Calculating depreciation for a specified period
      2m 13s
    5. VDB: Calculating declining balance depreciation for a partial period
      3m 24s
    6. AMORDEGRC: Calculating depreciation using a depreciation coefficient
      2m 27s
    7. AMORLINC: Calculating depreciation for each accounting period
      2m 43s
  4. 22m 33s
    1. FV: Calculating the future value of an investment
      2m 48s
    2. FVSCHEDULE: Calculating the future value of an investment with variable returns
      2m 21s
    3. PV: Calculating the present value of an investment
      2m 6s
    4. NPV: Calculating the net present value of an investment
      3m 17s
    5. IRR: Calculating internal rate of return
      2m 33s
    6. XNPV: Calculating net present value given irregular inputs
      2m 32s
    7. XIRR: Calculating internal rate of return for irregular cash flows
      1m 48s
    8. MIRR: Calculating internal rate of return for mixed cash flows
      2m 2s
    9. DISC: Calculating the discount rate of a security
      3m 6s
  5. 24m 12s
    1. COUPDAYBS: Calculating total days between coupon beginning and settlement
      3m 2s
    2. COUPDAYS: Calculating days in the settlement date's coupon period
      2m 48s
    3. COUPDAYSNC: Calculating days from the settlement date to the next coupon date
      3m 1s
    4. COUPNCD: Calculating the next coupon date after the settlement date
      2m 43s
    5. COUPNUM: Calculating the number of coupons between settlement and maturity
      2m 55s
    6. COUPPCD: Calculating the date of a coupon due immediately before settlement
      3m 4s
    7. DURATION: Calculating the annual duration of a security
      3m 20s
    8. MDURATION: Calculating the duration of a security using the modified Macauley method
      3m 19s
  6. 28m 43s
    1. DOLLARDE and DOLLARFR: Converting between fractional prices and decimal prices
      2m 36s
    2. INTRATE: Calculating the interest rate of a fully invested security
      2m 50s
    3. RECEIVED: Calculating the value at maturity of a fully invested security
      2m 46s
    4. PRICE: Calculating the price of a security that pays periodic interest
      3m 19s
    5. PRICEDISC: Calculating the price of a discounted security
      2m 48s
    6. PRICEMAT: Calculating the price of a security that pays interest at maturity
      1m 57s
    7. TBILLEQ: Calculating the bond-equivalent yield for a Treasury bill
      1m 50s
    8. TBILLPRICE: Calculating the price for a Treasury bill
      1m 31s
    9. TBILLYIELD: Calculating the yield of a Treasury bill
      1m 41s
    10. YIELD: Calculating the yield of a security that pays periodic interest
      2m 59s
    11. YIELDDISC: Calculating the annual yield for a discounted security
      2m 9s
    12. YIELDMAT: Calculating the annual yield of a security that pays interest at maturity
      2m 17s
  7. 12m 1s
    1. ODDFPRICE: Calculating the price of a security with an odd first period
      3m 17s
    2. ODDFYIELD: Calculating the yield of a security with an odd first period
      3m 3s
    3. ODDLPRICE: Calculating the price of a security with an odd last period
      2m 44s
    4. ODDLYIELD: Calculating the yield of a security with an odd last period
      2m 57s
  8. 1m 5s
    1. Additional resources
      1m 5s

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