How to Use the EFFECT Function in Excel

Today, we will explore the EFFECT function, a vital financial tool available in both Microsoft Excel and Google Sheets. This function is designed to calculate the annual effective interest rate given a nominal interest rate and the number of compounding periods per year.

How to Use EFFECT in Excel and Google Sheets

The syntax for the EFFECT function is consistent across both Excel and Google Sheets:

=EFFECT(nominal_rate, npery)
  • nominal_rate: This is the nominal annual interest rate.
  • npery: This represents the number of compounding periods per year.

It is important to note that both parameters must be greater than or equal to 0.

Examples of Using the EFFECT Function

To better understand the EFFECT function, let’s examine a couple of examples:

Example 1

Consider a scenario where you have a nominal annual interest rate of 5%, compounded quarterly. To calculate the annual effective interest rate, you would use the following inputs:

Input Formula Output
5% (0.05) =EFFECT(0.05, 4) 5.095% (0.05095)

In this case, the formula returns an annual effective interest rate of approximately 5.095%.

Example 2

For another example, assume a nominal rate of 6% per year with monthly compounding:

Input Formula Output
6% (0.06) =EFFECT(0.06, 12) 6.168% (0.06168)

Using the EFFECT function here shows that the annual effective interest rate is approximately 6.168%.

Through the application of the EFFECT function, you can effectively determine the annual effective interest rate from the specified nominal rate and compounding frequency.

More information: https://support.microsoft.com/en-us/office/effect-function-910d4e4c-79e2-4009-95e6-507e04f11bc4

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Returns the future value of an investment
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Returns the price per $100 face value of a discounted security
Returns the price per $100 face value of a security that pays interest at maturity
Returns the present value of an investment
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