Question

I want to lend my brother 25K and he agrees to pay me back at 37.4 K in 4 years. What is the interest rate? How would this be solved in excel using a formula?

Answer 1

Here we will use the following formula:

FV = PV * (1 + r%)ⁿ

where, FV = Future value = $37400, PV = Present value = $25000, r = rate of interest, n= time period = 4

now, putting theses values in the above equation, we get,

$37400 = $25000 * (1 + r)⁴

$37400 / $25000 = (1 + r)⁴

1.496 = (1 + r)⁴

(1.496)^1/4 = 1 + r

1.10594339 = 1 + r

r = 1.10594339 - 1

r = 0.10594339

r = 10.59%

So, interest rate is 10.59%.

In excel, we will use the following formula to calculate the rate:

=RATE(4,,25000,-37400)