How to calculate interest rate (based on Future Value)?



What is the formula to Calculate the interest rate if someone tells you that if you invest Rs. 5,000 per month for 20 years you will get Rs. 40,07,400/- (Rupees Forty Lakhs Seven Thousand Four Hundred Only)?

Why I am asking this? It is because it seems that LIC has come up with such a scheme. But, I just don’t want to fall for the final figure of Rupees Forty Lakhs Seven Thousand Four Hundred Only which it claims it would give if Rs. 5,000 is put every month. This is because 20 years means 240 months. And so if one puts Rs. 5,000 per month for 20 years it would mean a total of Rs. 12 Lakhs being put as Principal Amount itself. And then at the end of it LIC would give Rupees Forty Lakhs Seven Thousand Four Hundred Only. So in real sense the interest rate may be quite less (perhaps even lesser than what banks are offering on FDs). And so I need to know the formula to understand how to calculate (or arrive at) the interest rate of such schemes (which are much more like Recurring Deposits (RDs).

If someone is working in bank or is knowledgeable regarding this please do guide me.

Thanks in Advance!

Anita
By the way, I need the formula to calculate it dear. Not an answer like 10.41% like someone mentioned as answer. This is because henceforth if someone gives me any figure I must be able to calculate interest rate when I know Future value using that formula. And that too without visiting any internet site (After all, I should be able to do “back on the envelope calculation” to calculate interest rate. And so I need the formula. So please give that formula to know interest rate. Thanks in Advance!

Anita.

Thanks DrMark27. Your Formula may be right. But, your formula calculates Future Value after knowing the interest rate. Now, please work on that formula (rearrange it) and tell me formula for interest rate to get from it. For example, what I need is something like this

i=PMT [((1)n – 1) ]/FVoa

Where

FVoa = Future Value of an Ordinary Annuity
PMT = Amount of each payment
i = Interest Rate Per Period
n = Number of Periods

So that I can know interest rate if I know FVoa, PMT and n

Got It!

Thanks in Advance!

Anita.

How to calculate interest rate (based on Future Value)?
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3 Replies to “How to calculate interest rate (based on Future Value)?”

  1. The formula is give here:
    http://www.getobjects.com/Components/Finance/TVM/fva.html

    That’s about a 10.41% interest rate which means that you are probably taking on some pretty big risk.

    Edit: I give you a link to the formula, but you can’t get the formula? Do you know how Internet links work in browsers? I do not believe that you will be able to use that formula for a back of the envelope calculation (I used Excel) since finding i requires a numerical method. Once I would use an approximaton formula. Now I have a financial calculator on my cell phone so I don’t bother with such things. Did you want me to instruct you on how to use your cell phone?

    Edit 2: There’s a typo in drMark’s formula. As practice on using Internet links in browsers, you should find out what it is.


  2. FVoa = PMT [((1 + i)n – 1) / i]

    Where:

    FVoa = Future Value of an Ordinary Annuity
    PMT = Amount of each payment
    i = Interest Rate Per Period
    n = Number of Periods






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