Before we begin, let’s talk about annuity.
Annuity is a particular amount given to a person for a particular time being or at times, for the rest of life.
Now to solve the problem of annuity and find out the interest rate from some given values, here’s what we can do:
As you can see in the image above, we have Present Value, Future Value, Annual Payment as well the Years.
Step 1: Input the formula =RATE(
To find out the Interest Rate, we will use the RATE Function which is as follows:
Step 2: Input the required values in the formula
The following formula requires nper which is the no. of years (or in other words the no. of periodic payments), pmt (annual payment), pv is the present value and fv is the future value), the other two are optional which are not required in this function. But to clarify, it just helps you to add more detailing in the formula.
As we have explained everything above, let’s begin to input the values in the formula. The nper is the years or the no. of periodic payments, i.e. cell D5, 10 years.
Then we will come to pmt, which is short for payment. As the annual payment is 7000, so we will select the same, but please note, you need to input a minus sign before selecting the payment, or else your interest rate would not come out exactly!
Then we will select the present value which is 0 (cell D2).
And the last, we will select the future value, which is 1,00,000 or in other excel terms, cell D3.
Step 3: Cross- check the formula and proceed
By this, our overall formula becomes as follows:
*Please note: Do not forget the minus sign in the annual payment.
Now press enter and BAMMMM!!! The interest rate is 7.71%.
So, it’s easy, isn’t it?