Calculate the weighted average rate when combining different financial instruments or investments.
Blended Rate:
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Understanding Blended Rates
A blended rate, also known as a weighted average rate, is a single rate that represents the average rate of multiple financial components, each with its own rate and associated value (often an amount or principal). This concept is crucial in finance for understanding the overall cost of capital, the average return on a diversified portfolio, or the effective rate when consolidating different financial obligations.
How the Blended Rate is Calculated
The calculation involves weighting each individual rate by its corresponding amount and then dividing the sum of these weighted rates by the total amount. The formula is as follows:
Blended Rate = Σ (Ratei × Amounti) / Σ Amounti
Where:
Ratei is the rate of the i-th component.
Amounti is the amount associated with the i-th component.
The result is typically expressed as a percentage.
Use Cases for Blended Rates
Debt Consolidation: When combining multiple loans or credit card debts with different interest rates into a single new loan, the blended rate helps understand the overall interest cost.
Investment Portfolios: Calculating the average yield of a portfolio composed of various assets (stocks, bonds, mutual funds) with different dividend yields or interest rates.
Capital Structure: Businesses use blended rates to determine their weighted average cost of capital (WACC), which considers the cost of debt and equity.
Pricing: Determining an average price or rate when offering bundled services or products with varying individual costs.
Example Calculation
Let's say you have two investments:
Investment A: $10,000 at an annual rate of 5.00%
Investment B: $25,000 at an annual rate of 7.50%
Using the blended rate formula:
Weighted Rate A = 5.00% × $10,000 = $500
Weighted Rate B = 7.50% × $25,000 = $1,875
Total Amount = $10,000 + $25,000 = $35,000
Total Weighted Rate = $500 + $1,875 = $2,375
Blended Rate = $2,375 / $35,000 = 0.067857…
As a percentage, the blended rate is approximately 6.79%.
function calculateBlendedRate() {
var rate1 = parseFloat(document.getElementById("rate1").value);
var amount1 = parseFloat(document.getElementById("amount1").value);
var rate2 = parseFloat(document.getElementById("rate2").value);
var amount2 = parseFloat(document.getElementById("amount2").value);
var resultValueElement = document.getElementById("result-value");
// Input validation
if (isNaN(rate1) || isNaN(amount1) || isNaN(rate2) || isNaN(amount2)) {
resultValueElement.textContent = "Invalid input";
resultValueElement.style.color = "#dc3545"; // Red for error
return;
}
if (amount1 <= 0 || amount2 <= 0) {
resultValueElement.textContent = "Amounts must be positive";
resultValueElement.style.color = "#dc3545"; // Red for error
return;
}
// Convert rates from percentage to decimal for calculation
var decimalRate1 = rate1 / 100;
var decimalRate2 = rate2 / 100;
// Calculate weighted sums
var weightedSum = (decimalRate1 * amount1) + (decimalRate2 * amount2);
var totalAmount = amount1 + amount2;
// Calculate blended rate
var blendedRateDecimal = weightedSum / totalAmount;
// Convert back to percentage and format
var blendedRatePercentage = (blendedRateDecimal * 100).toFixed(2);
resultValueElement.textContent = blendedRatePercentage + "%";
resultValueElement.style.color = "#28a745"; // Green for success
}