An implicit interest rate is one that is not explicit; in other words, the rate is not stated. For example, if I lend you $5,000 and you agree to repay me $1,000 at the end of each year for six years you are obviously paying interest. However, our agreement did not specify any interest or interest rate. To find the interest rate that is "implicit" in this arrangement, you would do a present value calculation via a financial calculator, software, or present value tables. If you were to use a present value of an ordinary annuity table, you could use this format:
PVOA = PMT x PVOA factor for n=6, i=?;
$5,000 = $1,000 x PVOA factor for n=6, i=?;
$5,000/$1,000 = PVOA factor for n=6, i=?;
5.000 = PVOA factor for n=6, i=?
The factor 5.000 appears in the row n=6 where i = 5.5%. Hence, this loan has an implicit interest rate of 5.5%.
