How to Calculate Interest Rate From the Balance of Account and Interest Paid
Original post by Mark Kennan of Demand Media
When you know the ending balance of an account and the amount of interest earned on the account, you can calculate the compound annual rate of growth as long as you know how long it took you to earn that interest. You also have to account for the compounding effects of interest paid each year rather than just once at the end of the term. Calculating the interest rate helps you to decide whether an investment is worth holding.
Subtract the interest paid from the ending balance of the account to find the initial balance. For example, if you have an ending balance of $6,600 and you received $650 in interest, subtract $650 from $6,600 to find that the initial balance was $5,950.
Divide the ending balance of the account by the beginning balance. In this example, divide $6,600 by $5,950 to get 1.109243697.
Divide 1 by the number of years over which the interest accrued on the account. For this example, if the interest accrued over 2.5 years, divide 1 by 2.5 to get 0.4.
Calculate the result from Step 2 raised to the power of the result from Step 3 on a scientific calculator. Enter the Step 2 result, push the exponent key, then enter the Step 3 result and push the "=" key. In this example, enter "1.109243697" and push the exponent key, then enter "0.4" and push the "=" key, which gives you 1.0423.
Subtract 1 from the result to find the annual interest rate expressed as a decimal. If you prefer the rate as a percentage, multiply by 100. To conclude this example, subtract 1 from 1.0423 to get 0.0423, or an interest rate of 4.23 percent.
- Stanford University; CAGR (Compound Annual Growth Rate); Michael Fan; 2006
- DePaul University: Compound Interest Formula
About the Author
Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.
- Thinkstock/Comstock/Getty Images