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Math Help - Ordinary annuity problem

  1. #1
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    Dec 2008
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    Ordinary annuity problem

    PV - 260,000
    Monthly payment - 2071.46/12 payments per year
    Term - 15 years or 180months


    How do I calculate the interest rate?

    thanks
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  2. #2
    Junior Member
    Joined
    Nov 2008
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    Ordinary annuity problem

    Let's assume it's an annuity with payments beginning in one month (as opposed to right away; you didn't specify which), and let's assume you're looking for an annual interest rate. But we'll solve for the monthly rate first.

    The formula for the present value of an annuity is as follows:
    PV of Annuity = Periodic Annuity Amount * [1 - (1/(1+i))^n] / i

    So if PV = $260,000 and the Periodic Annuity Amount = $2,071.46, we can substitute into the above and get the following:

    125.5153 = [1 - (1/(1+i))^n] / i

    Since we know that n = 180, I believe this just becomes solving one equation for one unknown variable. Once you solve for i (the monthly interest rate), the annual interest rate should be (1+i)^12-1.

    - Steve J
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