When you are considering an investment, you want to know what rate of return an investment will give you. Some investments promise a fixed cost and a fixed payment at some point in the future. For example, a bond may cost $500 with the promise that $700 will be repaid 10 years in the future. Another bond may cost $600 with the promise that $900 will be repaid 15 years in the future. To determine which bond has a higher return, you need to determine the interest rate on the two investments.
Use the formula below where "I" is the interest rate, "F" is the future value, "P" is the present value and "T" is the time.
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I = (F / P) ^ (1 / T) - 1
Divide the future value by the present value. For example, if an investment would cost $100 today and would be worth $120 five years in the future, you would divide $120 by $100 and get 1.2.
Raise the number your calculated in Step 1 to the 1 divided by the number of years between the current value and the present value. For example, if the future value was predicted for 5 years in the future, you would raise the 1/5 power. Continuing the example, you would raise 1.2 to the 1/5 power and get 1.037.
Subtract 1 from the number calculated in Step 2 to get the interest rate. For example, you would subtract 1 from 1.037 to find that the annual interest rate is 0.037, or 3.7 percent.
The interest rate is not the only factor to consider when comparing investments. A bond that has a higher interest rate likely has a higher risk of defaulting.