XL: Computing Periodic Annual Interest Rate in Microsoft Excel

• Microsoft Excel for Windows, versions 2.x, 3.x, 4.x, 5.0, 5.0c
• Microsoft Excel for Windows 95, version 7.0
• Microsoft Excel for the Macintosh, versions 2.x, 3.0, 4.0, 5.0, 5.0a
• Microsoft Excel for Windows NT, version 5.0
• Microsoft Excel 97 for Windows
• Microsoft Excel 98 Macintosh Edition

SUMMARY

The RATE() function in Microsoft Excel, and the @RATE function in Lotus 1- 2-3, both return the periodic interest rate necessary for an investment to grow to a specific value over a specified number of compounding periods. However, in Microsoft Excel, RATE() assumes a known stream of payments. If the payment amount per period is not known, you can still use the RATE() function, but you must modify it slightly.

A manually entered formula must be used to determine the annualized interest rate for an investment with more than one compounding period per year. You can also use a custom function to make this calculation easier.

MORE INFORMATION

To use the RATE() function in Microsoft Excel when the payment per period is not known, you must enter the number of compounding periods, the present value as a negative number, and the future value.

For example, an initial investment of $1,000, that has grown to $2,000 when compounded quarterly over six years would return 2.93% per quarter when entered as follows:

   =RATE(24,,-1000,2000)

   =((FV/PV)^(1/N)^M)-1

The following formula, when used with the numbers from the previous example, will return 12.2462% per year:

   =((2000/1000)^(1/24)^4)-1

Creating a Function Macro in Excel 5.0 or Later

To create this function using Visual Basic for Applications, enter the following in a new Visual Basic module:

   Function Yearly_Rate(FV, PV, N, M) As Double     'Defines variables
       Yearly_Rate = ((FV / PV) ^ (1 / N)^M) - 1    'Performs computation
   End Function                                     'Ends function

1. Enter the following values on a worksheet:

         A1:   20000
         A2:   10000
         A3:      72
         A4:      12
   
   

2. In any blank cell, enter the following formula:

         =Yearly_Rate(A1,A2,A3,A4)
   

Creating a Function Macro for Excel 2.0, 3.0 or 4.0

Microsoft provides programming examples for illustration only, without warranty either expressed or implied, including, but not limited to, the implied warranties of merchantability and/or fitness for a particular purpose. This article assumes that you are familiar with the programming language being demonstrated and the tools used to create and debug procedures. Microsoft support engineers can help explain the functionality of a particular procedure, but they will not modify these examples to provide added functionality or construct procedures to meet your specific needs. If you have limited programming experience, you may want to contact the Microsoft fee-based consulting line at (800) 936-5200. For more information about the support options available from Microsoft, please see the following page on the World Wide Web:

   http://www.microsoft.com/supportnet/refguide/ 

   B1:  Yearly_Rate
   B2:  =RESULT(1)
   B3:  =ARGUMENT("FV",1)
   B4:  =ARGUMENT("PV",1)
   B5:  =ARGUMENT("N",1)
   B6:  =ARGUMENT("M",1)
   B7:  =RETURN((((FV/PV)^(1/N)^M))-1)

Example

To compute the periodic interest rate for a $10,000 investment that matures in six years, compounded monthly, with a maturity value of $20,000, follow these steps:

1. Enter the following on a Microsoft Excel worksheet:

         A1:   20000
         A2:   10000
         A3:      72
         A4:      12
   
   

2. Select cell B1, and then click Paste Function on the Formula menu.

3. Select the User Defined category, and then scroll to the bottom of the Paste Function list.

4. Choose your custom function and click OK.

      If the custom function macro is placed on a sheet named "RATE.XLM", the    
   

      =RATE.XLM!Yearly_Rate(FV,PV,N,M)