Simulate the Excel =EFFECT(nominal_rate, npery) Function
This is the annual interest rate before compounding (the 'nominal_rate' argument).
Annually (1)
Semi-annually (2)
Quarterly (4)
Monthly (12)
Weekly (52)
Daily (365)
The number of compounding periods per year (the 'npery' argument).
Effective Annual Rate
How to Calculate Effective Rate in Excel
The effective interest rate represents the actual return on a savings account or the actual interest rate paid on a loan when compounding is taken into account. In Excel, this is handled by the EFFECT function.
The Excel EFFECT Formula
To calculate the effective annual interest rate, use the following syntax:
=EFFECT(nominal_rate, npery)
nominal_rate: The stated annual interest rate (e.g., 0.05 or 5%).
npery: The number of compounding periods per year.
The Mathematical Logic
Under the hood, Excel uses the following formula to determine the effective rate:
Effective Rate = (1 + (Nominal Rate / n))^n – 1
Where n represents the number of compounding periods. As the frequency of compounding increases (e.g., from monthly to daily), the effective interest rate rises, even though the nominal rate stays the same.
Step-by-Step Example
If you have a credit card with a 15% nominal annual rate compounded monthly, here is how you calculate it in Excel:
In cell A1, enter 0.15 (or 15%).
In cell A2, enter 12 (for 12 months).
In cell A3, type =EFFECT(A1, A2).
The result will be 0.16075, or 16.08%.
Common Compounding Values (npery)
Frequency
npery Value
Semi-Annually
2
Quarterly
4
Monthly
12
Daily
365
function calculateEffectiveRate() {
var nominalInput = document.getElementById('nominalRate').value;
var npery = parseFloat(document.getElementById('compoundingPeriods').value);
if (nominalInput === "" || isNaN(nominalInput)) {
alert("Please enter a valid nominal interest rate.");
return;
}
var nominalRate = parseFloat(nominalInput) / 100;
if (nominalRate <= 0) {
alert("Nominal rate must be greater than 0.");
return;
}
// Formula: Effective Rate = (1 + (nominal / n))^n – 1
var effectiveRate = Math.pow((1 + (nominalRate / npery)), npery) – 1;
var effectivePercentage = (effectiveRate * 100).toFixed(4);
// Display Results
document.getElementById('effectiveRateResult').innerHTML = effectivePercentage + "%";
document.getElementById('excelFormulaDisplay').innerHTML = "Excel Syntax: =EFFECT(" + (nominalRate).toFixed(4) + ", " + npery + ")";
document.getElementById('resultArea').style.display = "block";
// Smooth scroll to result
document.getElementById('resultArea').scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}