The Excel RATE Function

Related Functions:
PMT Function
NPER Function

Basic Description

The Excel Rate function calculates the interest rate required to pay off a specified amount of a loan, or to reach a target amount on an investment, over a given period.

The syntax of the function is:

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

Where the arguments are as follows:

nper-The number of periods over which the loan or investment is to be paid.
pmt-The (fixed) payment amount per period.
pv-The present value of the loan / investment.
[fv]-

An optional argument that specifies the future value of the loan / investment, at the end of nper payments.

If omitted, [fv] takes on the default value of 0.
[type]-

An optional argument that defines whether the payment is made at the start or the end of the period.

The [type] argument can have the value 0 or 1, meaning:

0   -   the payment is made at the end of the period;
1   -   the payment is made at the beginning of the period.

If the [type] argument is omitted, it takes on the default value of 0 (denoting payments made at the end of the period).
[guess]-

An initial estimate at what the rate will be.

If this argument is omitted, it will take on the default value of 10% (=0.1)

(Note this is only a value for Excel to start off working with - Excel then uses an iterative procedure to converge to the correct rate).


Cash Flow Convention:

Note that, in line with the general cash flow convention, outgoing payments are represented by negative numbers and incoming payments are represented by positive numbers. This is seen in the examples below.


Rate Function Examples

Example 1

In the following spreadsheet, the Excel Rate function is used to calculate the interest rate required, with fixed payments of $1,000 per month, to pay off in full, a loan of $50,000 over a period of 5 years. The payments are to be made at the end of each month.

 Formulas:
Example of use of the Excel Rate Function
 Results:
Excel Rate Function Result

In the above example:


Example 2

In the following spreadsheet, the Excel Rate function is used to calculate the interest rate required, to save $20,000, over 2 years, with a starting value of zero, and monthly savings of $800. The payments are to be made at the start of each month.

 Formulas:
Example of use of the Excel Rate Function
 Results:
Excel Rate Function Result

In the above example:


Further examples of the Excel Rate function can be viewed on the Microsoft Office website.


Rate Function Errors

If you get an error from the Excel Rate function, this is likely to be one of the following:

Common Errors
#NUM!-

Occurs if the function fails to converge to a solution.

(This may be because you have failed to use the cash flow convention of negative numbers to represent outgoing payments and positive numbers to represent incoming payments. Alternatively, you may need to provide an initial 'guess' to the function.)
#VALUE!-Occurs if any of the supplied arguments are not recognised as numeric values

Also, the following problems are encountered by some users:

Common Problem No. 1

The result from the Excel Rate function is much higher or much lower than expected.

Possible Reason

When calculating monthly or quarterly payments, many users forget to convert the interest rate or the number of periods to months or quarters.

Solve this problem by ensuring that the the nper argument is expressed in the correct units. i.e.:

months = 12 * years
quarters = 4 * years

Common Problem No. 2

The result from the Excel Rate function appears to be the value 0 or appears as a percentage but shows no decimal places.

Possible Reason

This problem is often due to the formatting of the cell containing the function.

If this is the case, the problem will be fixed by formatting the cell to show a percentage, with decimal places:

  • Highlight the cell containing the function
  • Right click with the mouse
  • Select the Format Cells ... option and ensure the Number tab is selected
  • Under the Category heading, make sure the option Percentage is selected, and in the box to the right (entitled Decimal Places), change the value to 2 (or more).
  • Click OK