How To Calculate The Interest Rate On The Time Value Of Money (Future And Present Value) Explained

In this video we discuss how to calculate the interest rate in time value of money problems, when the future and present values are known. We go through an example using the formula

Transcript/notes
Here is the formula for the future value of money, with the definitions for all of the variables. And here are the steps to setting the equation to solve for the interest rate, R.

As an example, let’s say that someone invests $2000 in an account, the interest is compounded quarterly, so 4 times per year. After 5 years, the account equals $2899.90. What is the interest rate?

Using the formula, we have r, the interest rate equals, 4, times the quantity $2899.90 divided by $2000, raised to 1 divided by 4 times 5, minus 1.
From this we have 4, times the quantity 1.4499 rounded off raised to 1 over 20, minus 1. Here are the calculations written out on the screen. And this calculates to .075, or 7.5% as the interest rate on the investment.

Chapters/Timestamps
0:00 Formula to calculate the interest rate for the time value of money
0:10 Example problem
0:24 Problem set up

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