The Effective Annual Interest Rate is a measure of interest that incorporates the compounding of interest and is frequently used to compare financial loans with different compounding terms.
where nominal_rate is the nominal interest rate and npery is the number of compounding periods per year.Further information is given on the Wikipedia Effective Interest Rate Page
The Excel EFFECT function returns the effective annual interest rate for a given nominal interest rate and number of compounding periods per year.
The format of the function is:
where the arguments are as follows:
|nominal_rate||-||The nominal interest rate (must be a numeric value, between 0 and 1).|
|npery||-||The number of compounding periods per year (must be a positive integer).|
The spreadsheet below shows examples of the Excel Effect Function, used to calculate the effective annual interest rate for 3 different nominal interest rates and numbers of compounding periods.
Further details of the Excel Effect function are provided on the Microsoft Office website.
If you get an error from the Excel Effect function this is likely to be one of the following:
|#NUM!||-||Occurs if the supplied nominal_rate argument is ≤ 0, or the supplied npery argument is < 1.|
|#VALUE!||-||Occurs if one or both of the supplied arguments are non-numeric.|