An implied interest rate represents the nominal interest rate that is implied when you borrow a fixed amount of money and return a different amount of money in the future. For example, if you borrow $ 100,000 from your brother and promise him to pay him back the same amount plus an extra $ 25,000 over 5 years, you are paying an implicit interest rate. Here's how it's calculated.
Steps
Step 1. Divide the total loan to be repaid by the amount of money borrowed
Using the same example, you borrowed $ 100,000 and you have to pay back a total of $ 125,000, so divide $ 125,000 by $ 100,000 and the result will be 1.25.
Step 2. Raise the result of the first pass to the power of 1 / n, where n is the duration of the time period for which you pay interest
For simplicity, we can use n = 5 to denote 5 years, to calculate the annual implicit interest rate. So 1, 25 ^ (1/5) = 1, 25 ^ 0.2 = 1.0456.
Step 3. Subtract 1 from the previous result
So 1, 0456 - 1 = 0, 0456.
Step 4. Multiply the previous result by 100% and you will arrive at 4.56%
Here is the implied annual interest rate.
