The RATE() function in Microsoft Excel returns the periodic interest rate necessary for an investment to grow to a specific value over a specified number of compounding periods. However, the RATE() function assumes a known periodic payment amount. If the payment amount per period is not known, you can still use the RATE() function, but you must modify it slightly.
You must use a manually entered formula 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.
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:
To determine the annualized interest rate for an investment, use the
where FV is the future value of an investment, PV is the initial
investment, N is the total number of compounding periods, and M is the
number of compounding periods per year.
The following formula, when used with the numbers from the previous
example, will return 12.2462% per year:
Creating a Visual Basic Function
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To create this function in Microsoft Visual Basic for Applications, follow these steps:
- Start Microsoft Excel and press ALT+F11 to start the Visual Basic Editor.
- On the Insert menu, click Module.
- In the module sheet, type the following function:
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.
- Press ALT+Q to return to Excel.
Using the Function
To use the custom function, follow these steps:
- Type the following values in a worksheet:
- In any blank cell, type the following formula:
The annual interest rate is returned as .122462 (12.2462%).
For more information about the RATE worksheet function, click Microsoft Excel Help
on the Help
menu, type rate worksheet function
in the Office Assistant or the Answer Wizard, and then click Search
to view the topic.