Corporate strategy and planning are heavily reliant on financial considerations. We have a high level of financial choices to be made in our daily lives. Excel has several functions and formulas that are specifically developed to calculate the interest rate in Excel for a given time in such situations.
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3 Suitable Ways to Calculate Interest Rate in Excel
We’ll go through four different approaches to determine the interest rate in the sections below. An example data set is provided in the image below to do the computation. We’ll calculate the Monthly and Yearly Interest Rates, as well as the Effective and Nominal Interest Rates, using formulas and functions.
1. Use Formula to Calculate Periodic Interest Rate in Excel
We’ll start by calculating the interest rate for a specific time period, such as months or years. We will compute the interest rate for months and then for years in the two subsections below. Follow the steps outlined below to do so.
We will apply the RATE function to have done it.
=RATE(nper, pmt, pv, [fv], [type], [guess])
- Nper (required) – total payment periods number (years, months)
- Pmt (required) – the pre-set payment amounts each period that cannot be varied over the annuity’s lifetime. It generally involves principal and interest but excludes taxes.
- Pv (required) – the present worth of the loan.
- Fv (optional) – the future worth, or the cash balance you want after the last instalment It defaults to 0 if not specified.
- Type (optional) – specifies the date on which the payments are made:
- Payment is due at the end of the period if 0 or absent (default).
- 1 – the first payment is required at the start of the period.
- Guess (optional) – your best guess as to what the rate may be If you leave it blank, it defaults to 10%.
1.1 Monthly Interest Rate
- To calculate the monthly interest rate, we will select cell F4. In cell F4, type the following formula.
- Then, press Enter to get the Interest Rate.
1.2 Annual Interest Rate
We compute the monthly interest rate first, then multiply by 12 to get the annual interest rate. To understand, follow the steps below.
- Type the following formula in cell F4.
- Because years include 12 months, multiply the previous calculation by the value of C7 or write the following formula to get the annual interest rate.
- Therefore, the Annual Interest Rate will be shown in cell F6.
Notes. Pay attention to the C5 cell; it is in negative form since the payment will be reduced after each transaction. It will show a #NUM error if you don’t put the value in negative.
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2. Apply Formula to Calculate Effective Interest Rate in Excel
The phrase “effective interest rate” denotes the genuine yearly return on an investment that is obtained as a result of compounding over time. We may do it in two ways: using the conventional compound interest method or simply using a function. Follow the steps outlined below in two sections.
- i= the rate of interest.
- n= number of the compounding periods.
2.1 Use the Formula of Compound Interest
- To input the formula of effective interest rate, simply type the formula.
- The formula is,
=(1+C4/C5)^C5 - 1
- Then, press Enter to see the results.
2.2 Use the EFFECT Function
- In cell C8, type the formula of the EFFECT function.
- Finally, press Enter to get the Effective Interest Rate.
3. Convert Effective Interest to Nominal Interest
Additionally, you can get back to the Nominal/Simple Interest Rate from the Effective Interest Rate. To do so, follow the steps of applying the NOMINAL function.
- Firstly, enter the following formula of the NOMINAL function.
- Then, press Enter to get the Nominal Interest Rate.
To summarize, I hope you have gained a good grasp of how to calculate interest rates in Excel as a result of this essay. All of these methods should be learned and applied to your dataset. Examine the practice book and put your newly acquired skills to the test. We’re encouraged to keep developing classes like this because of your critical support.
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