How to use EFFECT function in Excel?

The `EFFECT` function in Excel is used to calculate the effective annual interest rate given a nominal interest rate and the number of compounding periods per year. This is useful in finance for understanding the actual cost of a loan or the true yield on an investment with multiple compounding periods.

Syntax

EFFECT(nominal_rate, npery)

nominal_rate: This is the nominal annual interest rate, often expressed as a decimal. For example, for a nominal rate of 5%, you would enter `0.05`.
npery: This is the number of compounding periods per year. For instance, if interest is compounded monthly, you would enter `12`.

Example Usage

Suppose you have a nominal interest rate of 6% that compounds quarterly. You want to find out the effective annual interest rate.

   =EFFECT(0.06, 4)

In a cell, enter the following formula:
Press Enter.
The result will be approximately `0.061363`, or 6.1363% when formatted as a percentage. This means the effective annual rate is 6.1363% when compounded quarterly.

Important Notes

Make sure to enter the nominal rate as a decimal (e.g., 5% should be entered as `0.05`).
The npery should be a positive integer that represents how often the interest is compounded during one year.
The `EFFECT` function is part of the Financial functions in Excel.

This function is particularly useful for comparing the interest rates of different financial products that may compound interest over different periods.

facebooklinkedin