Posts Tagged ‘Understanding Interest Rates’

by Tim Langeman

In a previous blog post, I described how to use a spreadsheet like Microsoft Excel to calculate interest rates.  Again, interest rate calculations are at the core of MFTransparency‘s ability to provide accurate data that can be compared across various products offered by numerous MFIs. In the last post we looked at Excel’s IRR and XIRR functions and concluded that XIRR is more accurate because it takes into account the actual payment dates of the loan and thus allows us to calculate annualized interest rates even with irregular repayment schedules.

But for the more technical among us, I realize that even this may not be sufficient. Today I’m going to demonstrate how to write a computer program that is as accurate as Excel 2007′s XIRR function.  This article is likely to be of less broad interest, but it provides transparency into how we will calculate interest rates for future data collection trips; and it may be useful for MFIs that wish to automate interest rate calculations for a larger data set than can be handled with Excel.

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by Tim Langeman

Chuck Waterfield and Alexandra Fiorillo, MFTransparency‘s CEO and VP respectively, have been doing many presentations about how interest rates can be calculated using our excel tool, but we haven’t yet featured a story on our blog about our data collection process and our corresponding excel tool. Although technical, interest rate calculations are really at the heart of MFTransparency‘s mission and calculating accurate interest rates is vital to providing transparent pricing data. So today, I would like to give you a brief demonstration of the IRR and XIRR Excel functions, as a way to provide background for the techniques we’ve used to automate interest rate calculations on our web site.

For those of you less familiar with excel, this spreadsheet software offers numerous formulas allowing quick and easy calculations within each spreadsheet. As it is particularly geared towards financial use, there are ready made formulas specifically meant for calculating interest rates. The most basic (but still powerful) calculation is the internal rate of return. (more…)