Periodic Rate Calculator
How to Calculate Periodic Rate in Excel
Calculating the periodic rate is a fundamental step in financial analysis, particularly when dealing with loans, mortgages, or compound interest investments that accrue interest more frequently than once a year. The periodic rate represents the interest rate charged or earned for a specific time interval (such as a month or a day), rather than the standard annual timeline.
While the Annual Percentage Rate (APR) provides a high-level view of costs, the periodic rate is the actual percentage applied to the principal balance during each compounding period.
The Periodic Rate Formula
The mathematics behind the periodic rate is straightforward. It is derived by dividing the nominal annual interest rate by the number of compounding periods in a single year.
For example, if you have a nominal annual rate of 12% compounded monthly:
- Annual Rate = 0.12
- Periods (N) = 12
- Periodic Rate = 0.12 / 12 = 0.01 (or 1%)
Calculating Periodic Rate in Excel
Excel does not have a single dedicated function named "PERIODICRATE," because the calculation is a simple arithmetic operation. To calculate it in a spreadsheet, you simply reference the cell containing the annual rate and divide it by the frequency.
Method 1: Direct Division
If cell A1 contains your Annual Rate (e.g., 6%) and you want the monthly periodic rate, the formula is:
=A1/12
Method 2: Using the RATE Function
In more complex scenarios where you do not know the annual rate but you know the loan details (Total Periods, Payment Amount, and Present Value), you can use Excel's built-in RATE function to derive the periodic rate.
Syntax: =RATE(nper, pmt, pv, [fv], [type], [guess])
- nper: Total number of payment periods.
- pmt: The payment made each period (negative number for cash outflow).
- pv: The present value or total loan amount (positive number).
The result of the RATE function is the periodic rate, not the annual rate. To get the annual rate from this, you would multiply the result by the number of periods per year.
Periodic Rate vs. Effective Annual Rate (EAR)
It is crucial to distinguish between the periodic rate and the Effective Annual Rate (EAR). The periodic rate is a nominal figure used for calculation. The EAR accounts for the effects of compounding, showing the true yield or cost over a year.
As shown in the calculator above, a 12% nominal rate compounded monthly results in a 1% periodic rate, but an Effective Annual Rate of roughly 12.68% due to the interest-on-interest effect.