What is EFFECT function in Excel?
EFFECT function is one of the Financial functions in Microsoft Excel that returns the effective annual interest rate, given the nominal annual interest rate and the number of compounding periods per year.
Syntax of EFFECT function
The EFFECT function syntax has the following arguments:
- Nominal_rate: The nominal interest rate.
- Npery: The number of compounding periods per year.
EFFECT formula explanantion
- Npery is truncated to an integer.
- If either argument is nonnumeric, EFFECT returns the #VALUE! error value.
- If nominal_rate ≤ 0 or if npery < 1, EFFECT returns the #NUM! error value.
- EFFECT is calculated as follows:
- EFFECT (nominal_rate,npery) is related to NOMINAL(effect_rate,npery) through effective_rate=(1+(nominal_rate/npery))*npery -1.
Example of EFFECT function
Steps to follow:
1. Open a new Excel worksheet.
2. Copy data in the following table below and paste it in cell A1
Note: For formulas to show results, select them, press F2 key on your keyboard and then press Enter.
You can adjust the column widths to see all the data, if need be.
|0.0525||Nominal interest rate|
|4||Number of compounding periods per year|
|=EFFECT(A2,A3)||Effective interest rate with the terms above||0.0535427|