Thankfully, the process is much easier than this equation for many financial purposes
Fortunately, in many cases, we don't need to do any of this fancy math to calculate the interest rate in the financial world. For short-term investments, like Treasury bills (T-bill), this formula is accurate and far simpler than our first equation.
In the case of a T-bill, we know our purchase price, or present value; its face value, or future value; and how long until it matures. For short-term Treasuries, this duration could be 30 days to 182 days, depending on the specific note. Let's assume our bond cost us $4,900 to purchase, has a face value of $5,000, and will mature in 182 days.
- The first step is to subtract the present value from the future value to determine the actual cash return we'll receive over this period. In this case, that works out to $100.
- Next, divide that difference by the face value of the Treasury bill: $100 divided by $6,000 is 0.0167.
- The final step is to multiply that result by the 360 divided by the days to maturity, 182 in this case: 360 divided by 182 and multiplied by 0.0167 gives us 0.033, or a 3.3% annual interest rate on this Treasury bill.
