Thread: 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

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