Excel 2000 in a Nutshell

Name

EFFECT

Synopsis

You can use EFFECT (an Analysis ToolPak function) to determine the effective annual interest rate for an investment. To use this function you need to know the nominal annual interest rate and the number of times that interest is compounded per year.

To Calculate

=EFFECT(Nominal_Rate, Npery)

Both arguments are required for this function.

Nominal_Rate

A numeric value that indicates the nominal interest rate for the investment. For example, if the interest rate is 10.5% the value of this argument would be 0.105.

Npery

A numeric value that indi cates the number of times per year that the interest is compounded.

Example

Figure 12-9 illustrates the results of converting a 12% nominal interest rate paid monthly to the equivalent effective rate. Because the interest is compounded, it is actually a 12.68% effective rate. The example also converts a 12% effective rate to the equivalent nominal rate.

Figure 12-9. Excel provides functions for converting between the effective and nominal interest rates