Effective Annual Interest Rate

You can get your answer by rephrasing your question to: "If I invest $1100
today, what interest rate will I need to have $1300 in 8 months time?". Use
the Rate function to get your answer:

=Rate(8,0,-1100,1300)

This gives you the monthly rate. To get the effective annual rate, use (with
the Analysis ToolPak loaded):

=Effect(rate(8,0,-1100,1300),12)*12

I get 25.5% as the effective rate. Pay the whole $1200 today.

--
Regards,
Fred
Please reply to newsgroup, not e-mail


"John" <gradual_rot@yahoo.com> wrote in message
news:d2nq7k$2qr$1@lust.ihug.co.nz...
> I'm trying to work out the effective annual interest rate for:
>
> an item can be purchased for a payment of $100 today and a further $1,300
> in 8 months time. The other option is to pay in full today for a cash
> price of $1,200.
>
> How can I calculate the effective annual interest rate (assuming monthly
> compounding) being implicitly charged?
>
>

Effective Annual rate is the rate if compounded annually, will yield the
same amount of interest as if compounded monthly

So using the function

=Rate(8,0,-1100,1300)
will give a monthly rate of 2.11%

Hence the effective Annual rate

= ((1+2.11%)^12 )-1

=28.47%



Therefore if you financed 1100 today you have to pay 1300 in 8 months and
1.2847 * 1100 = 1413.17 in 12 months



Using the effect function that fred suggested we are erroneously dividing
the monthly rate by 12 and then compounding that

If 25.5% is the correct annual rate then in 12 months 1100 would be = 1100*
1.255 = 1380.50

If in 8 months 1100 increases by 200 to 1300 then how come in next 4 months
it only increases by 80.5 (from 1300 to 1380.5) whereas it should at least
increase by 100 ignoring

the effect of compounding







"Fred Smith" <fredsmith99@yahoo.com> wrote in message
news:eCF0%23TGOFHA.508@TK2MSFTNGP12.phx.gbl...
> You can get your answer by rephrasing your question to: "If I invest $1100
> today, what interest rate will I need to have $1300 in 8 months time?".
> Use the Rate function to get your answer:
>
> =Rate(8,0,-1100,1300)
>
> This gives you the monthly rate. To get the effective annual rate, use
> (with the Analysis ToolPak loaded):
>
> =Effect(rate(8,0,-1100,1300),12)*12
>
> I get 25.5% as the effective rate. Pay the whole $1200 today.
>
> --
> Regards,
> Fred
> Please reply to newsgroup, not e-mail
>
>
> "John" <gradual_rot@yahoo.com> wrote in message
> news:d2nq7k$2qr$1@lust.ihug.co.nz...
>> I'm trying to work out the effective annual interest rate for:
>>
>> an item can be purchased for a payment of $100 today and a further $1,300
>> in 8 months time. The other option is to pay in full today for a cash
>> price of $1,200.
>>
>> How can I calculate the effective annual interest rate (assuming monthly
>> compounding) being implicitly charged?
>>
>>
>
>