Quick Answer

EFFECT Function

Calculates the effective annual interest rate from a nominal rate.

Syntax

EFFECT

(nominal_rate, npery)

Parameters

Parameter	Description	Required
nominal_rate	Nominal annual interest rate.	Required
npery	Number of compounding periods per year.	Required

Basic Example

Effective annual rate for a 6% nominal rate compounded monthly

=EFFECT(0.06, 12)

Result6.17%

A 6% nominal rate compounded monthly equals an effective annual rate of about 6.17%.

Advanced Examples

Example 1: Compare loans with different compounding

Loan shopping

Effective rate for quarterly compounding

=EFFECT(0.06, 4)

Result: 6.14%

Quarterly compounding gives a slightly lower effective rate than monthly compounding.

How EFFECT Works

EFFECT uses the formula (1 + nominal_rate / npery)^npery - 1 to convert the nominal rate to the effective annual rate.

1

Enter nominal_rate

Type the nominal_rate

2

Enter npery

Type the npery

3

Calculate

Press Enter to get the result.

Important Notes & Limitations

Requires npery >= 1.
Does not include fees.
Useful for comparing loans with different compounding frequencies.

Common Errors & Fixes

#NUM! errornpery is less than 1.

Fix: Ensure npery is at least 1.

Wrong rateNominal rate was entered as a percentage instead of a decimal.

Fix: Enter 0.06 for 6%, not 6.

Download Practice File

Practice EFFECT with Real Data

Download a sample CSV file with pre-populated data and practice exercises for the EFFECT function. Works in both Excel and Google Sheets.

Works in Google SheetsCompatible with ExcelIncludes exercises

File format: CSV (comma-separated values) - opens in Excel, Google Sheets, and all spreadsheet apps

Related Functions

ACCRINT

Calculates accrued interest for a security that pays periodic interest.

ACCRINTM

Calculates accrued interest for a security that pays interest at maturity.

AMORDEGRC

Calculates depreciation for a specific period using the French declining balance method.

AMORLINC

Calculates depreciation for a specific period using the French straight-line method.

COUPDAYBS

Calculates the number of days from the beginning of the coupon period to the settlement date.

COUPDAYS

Calculates the number of days in the coupon period that contains the settlement date.

Frequently Asked Questions

What is the difference between NOMINAL and EFFECT?

NOMINAL converts an effective rate to a nominal rate. EFFECT converts a nominal rate to an effective rate.

Why is the effective rate higher than the nominal rate?

Because interest is earned on interest within the year.