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    Default Loan Constant

    I am trying to back into the interest rate and term of a loan constant. and also go forward, however i am not coming up to what is supposedly the correct answer...
    (.0625/12)/(1-(1/(1+(.0625/12))^300)) which is supposed to reflect 6.25% and 25 yr amortization to determine the constant. I am being told the answer is 7.916% however that is not what comes up in excel.. Any suggestions. i know i must have a paren in the wrong spot.
    and why would i come up with something different than on just the annual basis - =(0.0625)/(1-(1/(1+(0.0625))^25))?

    Thanks

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    MrExcel MVP shg's Avatar
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    Default Re: Loan Constant

    =6.25% / (1 - 1/(1+6.25%)^25) returns 8.0095%

    More simply, though, so does =PMT(6.25%, 25, -1)

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    Default Re: Loan Constant

    =PMT(6.25%/12,25*12,-1)*12 returns 7.916033%. Is the difference between the two just that it is 7.916033% on a monthly compounding basis which equates to a 8.009462% annual basis?

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    MrExcel MVP shg's Avatar
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    Default Re: Loan Constant

    Yes, because you make payments throughout the year rather than in a lump sum at the end of the year.

    Edit: Maybe that wasn't clear -- you are paying less for the whole loan because you're paying monthly, so less interest accumulates on the outstanding balance.
    Last edited by shg; Sep 6th, 2011 at 06:44 PM.

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    Default Re: Loan Constant

    You are getting a result of about .66%?

    Multiply your result by 12.

    Sorry it took so long.

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