Financial Excel function/ formula Rate Explanation

 

The RATE function in Excel is used to calculate the interest rate per period of an investment based on a series of periodic cash flows. This can be particularly useful when you want to determine the interest rate required to reach a certain investment goal or to evaluate the interest rate on a loan or investment.

Here is the syntax for the RATE function:

excel
=RATE(nper, pmt, pv, [fv], [type], [guess])

• nper (required): The total number of payment periods.
• pmt (required): The payment made each period; it remains constant throughout the annuity's life.
• pv (required): The present value, or the total amount that a series of future payments is worth now.
• fv (optional): The future value, or a cash balance that you aim to attain after the last payment is made. If omitted, it is assumed to be 0.
• type (optional): The timing of the payment: 0 if the payment is due at the end of the period, and 1 if it is due at the beginning of the period. If omitted, it is assumed to be 0.
• guess (optional): An initial guess at the rate, which can improve the performance of the calculation. If omitted, the RATE function uses 10% as the default.

For example, if you have an investment where you make monthly payments of $1,000 for 5 years (60 months), and the present value of the investment is $50,000, you can use the RATE function to find the interest rate:

excel
=RATE(60, -1000, 50000)

In this example, the result would be the monthly interest rate required to reach the investment goal based on the provided parameters.

Remember, when using financial functions like RATE, it's important to understand the conventions used for signs. Cash inflows (such as money received) are typically represented as positive numbers, while cash outflows (such as payments) are represented as negative numbers. The RATE function assumes this convention, so make sure your inputs follow it.