EFFECT function in excel is a financial function. It is used to find effective annual interest rate. It is defined as the actual interest rate earned annually due to compounding. It is a worksheet function and can be entered in the cell in which value is required.
- Nominal_Rate: It is the nominal interest rate.
- NPERY: It is the number of compounding period per year.
- Npery is converted to an integer.
- If any of the argument is nonnumeric, #VALUE! error is displayed.
- If nominal_rate less than or equal to 0 or if npery is less than 1, #NUM! error is displayed.
- EFFECT is calculated as follows:
- EFFECT (nominal_rate,npery) can be compared to NOMINAL(effect_rate,npery) by the following formula: effective_rate=(1+(nominal_rate/npery))*npery -1.
- In this example, various arguments are entered in column A and their values are entered in column B and EFFECT function is used to retrieve the result in column D. Formula used for calculation is: