EFFECT

The EFFECT function returns the effective annual interest rate from the nominal annual interest rate based on the number of compounding periods per year. Both arguments are number values.

EFFECT(nominal-rate, num-periods-year)

nominal-rate: The nominal rate of interest of a security. nominal-rate is entered as a decimal (for example, 0.08) or with a percent sign (for example, 8%).

num-periods-year: The number of compounding periods per year. num-periods-year must be greater than 0.

Examples
The actual (effective) interest rate will vary from the nominal rate, depending on the way interest is compounded. For the following examples, suppose a savings account with a stated (nominal-rate) interest of 5.00%. =EFFECT(0.05,365) returns approximately 5.12674964674473%, the effective annual interest rate if 5% is compounded daily (num-periods-year is 365). =EFFECT(0.05, 12) returns approximately 5.1161897881733%, the effective annual interest rate if 5% is compounded monthly. =EFFECT(0.05, 4) returns approximately 5.09453369140622% , the effective annual interest rate if 5% is compounded quarterly. =EFFECT(0.05, 2) returns approximately 5.06249999999999% , the effective annual interest rate if 5% is compounded semiannually. =EFFECT(0.05, 1) returns approximately 5%, the effective annual interest rate if 5% is compounded annually. In this case, the nominal and effective annual rates are the same because there is no interim compounding.

Examples

The actual (effective) interest rate will vary from the nominal rate, depending on the way interest is compounded. For the following examples, suppose a savings account with a stated (nominal-rate) interest of 5.00%.

=EFFECT(0.05,365) returns approximately 5.12674964674473%, the effective annual interest rate if 5% is compounded daily (num-periods-year is 365).

=EFFECT(0.05, 12) returns approximately 5.1161897881733%, the effective annual interest rate if 5% is compounded monthly.

=EFFECT(0.05, 4) returns approximately 5.09453369140622% , the effective annual interest rate if 5% is compounded quarterly.

=EFFECT(0.05, 2) returns approximately 5.06249999999999% , the effective annual interest rate if 5% is compounded semiannually.

=EFFECT(0.05, 1) returns approximately 5%, the effective annual interest rate if 5% is compounded annually. In this case, the nominal and effective annual rates are the same because there is no interim compounding.