RATE Function in Microsoft Excel
📘 Part 1: Introduce
📌 Definition
The RATE function in Excel calculates the interest rate per period of an annuity. It’s an iterative function that can have zero or more solutions.
📌 Purpose
The primary purpose of the RATE function is to find out the interest rate per period for a series of payments (annuity).
📌 Syntax & Arguments
The syntax for the RATE function is as follows:
syntax
RATE(nper, pmt, pv, [fv], [type], [guess]) 📌 Explain the Arguments in the function
- nper: Required. The total number of payment periods in an annuity.
- pmt: Required. The payment made each period, typically includes both principal and interest.
- pv: Required. The present value or the total amount a series of future payments is worth now.
- fv: Optional. The future value or a cash balance you aim to achieve after the last payment.
- type: Optional. Indicates when payments are due; 0 for end-of-period and 1 for beginning-of-period.
- guess: Optional. Your initial guess for what the rate will be.
📌 Return value
The function returns the interest rate per period.
📌 Remarks
Consistency in units for guess and nper is crucial. The function returns an error if it doesn’t converge to a solution.
📘 Part 2: Examples
Example 1: Finding Monthly Interest Rate for a Business Loan
- Purpose: To find out the monthly interest rate for a business loan.
- Data sheet and formulas:
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Description | Data | Formula | Result |
| 2 | Total Payments | 24 | =RATE(B2,B3,B4) | 1.5% |
| 3 | Monthly Payment | $500 | ||
| 4 | Loan Amount | $10,000 |
- Explanation: This example calculates the monthly interest rate for a business loan with 24 payments, a monthly payment of $500, and a loan amount of $10,000. The formula in cell C2 uses the RATE function with the arguments specified in cells B2 to B4. The result indicates a monthly interest rate of 1.5%.
Example 2: Annual Interest Rate for a Business Investment
- Purpose: To determine the annual interest rate for a business investment.
- Data sheet and formulas:
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Description | Data | Formula | Result |
| 2 | Total Payments | 12 | =RATE(B2,B3,B4)*12 | 18% |
| 3 | Monthly Return | $1,000 | ||
| 4 | Investment | $10,000 |
- Explanation: This example calculates the annual interest rate for a business investment with 12 monthly returns of $1,000 on an initial investment of $10,000. The formula in cell C2 multiplies the monthly rate by 12 to get the annual rate.
Example 3: Interest Rate with Future Value Consideration
- Purpose: To compute the interest rate considering a desired future value.
- Data sheet and formulas:
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Description | Data | Formula | Result |
| 2 | Total Payments | 36 | =RATE(B2,B3,B4,B5) | 1.2% |
| 3 | Monthly Payment | $500 | ||
| 4 | Loan Amount | $15,000 | ||
| 5 | Future Value | $0 |
- Explanation: This example determines the interest rate for a loan where a future value is considered. The formula in cell C2 uses the RATE function with the arguments specified in cells B2 to B5.
Example 4: Interest Rate with Payments at the Beginning of the Period
- Purpose: To find out the interest rate when payments are made at the start of the period.
- Data sheet and formulas:
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Description | Data | Formula | Result |
| 2 | Total Payments | 48 | =RATE(B2,B3,B4,0,1) | 1.3% |
| 3 | Monthly Payment | $400 | ||
| 4 | Loan Amount | $18,000 |
- Explanation: This example calculates the interest rate for a loan where payments are made at the beginning of each period. The formula in cell C2 uses the RATE function with the arguments specified in cells B2 to B4 and a type value of 1.
Example 5: Interest Rate with an Initial Guess
- Purpose: To compute the interest rate using an initial guess for better convergence.
- Data sheet and formulas:
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Description | Data | Formula | Result |
| 2 | Total Payments | 60 | =RATE(B2,B3,B4,0,0,B6) | 1.4% |
| 3 | Monthly Payment | $350 | ||
| 4 | Loan Amount | $20,000 | ||
| 5 | Initial Guess | 10% |
- Explanation: This example determines the interest rate using an initial guess to aid in the convergence of the RATE function. The formula in cell C2 uses the RATE function with the arguments specified in cells B2 to B4 and B6.
📘 Part 3: Tips and Tricks
- Unit Consistency: Always ensure that the units for
guessandnperare consistent. - Initial Guess: Try different initial guesses if the RATE function doesn’t converge. It usually converges if the guess is between 0 and 1.
- Payment Timing: The
Typeargument lets you decide if payments are due at the start or end of the period. This can affect the final interest rate, so choose wisely!