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EFFECT

The EFFECT function calculates the effective annual interest rate based on the nominal annual interest rate and the number of compounding periods per year. It is commonly used in financial calculations to determine the true cost of borrowing or the real rate of return on an investment.

Usage

Use the EFFECT formula with the syntax shown below, it has 2 required parameters:

=EFFECT(nominal_rate, periods_per_year)
Parameters:
  1. nominal_rate (required):
    The nominal annual interest rate, expressed as a percentage.
  2. periods_per_year (required):
    The number of compounding periods per year.

Examples

Here are a few example use cases that explain how to use the EFFECT formula in Google Sheets.

Calculating the effective interest rate on a loan

By using the EFFECT function, you can determine the true annual interest rate on a loan that is compounded more than once per year. This helps you compare different loan offers and choose the one with the lowest effective interest rate.

Comparing investments with different compounding frequencies

If you have two investments with different compounding frequencies, you can use the EFFECT function to calculate their effective annual interest rates and compare them on an apples-to-apples basis.

Calculating the yield on a bond

Bonds often have a nominal interest rate that is different from their yield to maturity. By using the EFFECT function, you can determine the effective annual yield on a bond based on its purchase price and future cash flows.

Common Mistakes

EFFECT not working? Here are some common mistakes people make when using the EFFECT Google Sheets Formula:

Incorrectly inputting nominal_rate or periods_per_year

One common mistake is inputting the wrong value for nominal_rate or periods_per_year. Make sure to double-check your inputs and ensure that they are the correct values for your calculation.

Not converting nominal_rate or periods_per_year to a decimal

Another common mistake is not converting the nominal_rate or periods_per_year to a decimal. Make sure to divide the nominal rate by 100 and ensure that the periods per year are expressed as a decimal value.

Using the wrong formula for your calculation

EFFECT is used to calculate the effective annual interest rate given the nominal interest rate and number of compounding periods per year. Ensure that you are using the correct formula for your specific calculation needs.

Related Formulas

The following functions are similar to EFFECT or are often used with it in a formula:

  • NOMINAL

    The NOMINAL function calculates the nominal annual interest rate given the effective rate and the number of compounding periods per year. This function is commonly used in financial calculations to convert the effective interest rate to the nominal interest rate.

  • PV

    The PV function in Google Sheets calculates the present value of a regular payment stream or a lump sum amount, based on a constant interest rate. It is commonly used in financial analysis to determine the value of investments or loans. This function returns a negative value, as it represents money flowing out from the user.

  • FV

    The FV function calculates the future value of an investment based on periodic constant payments and a constant interest rate. It takes into account the present value of the investment, the number of periods in which the payments are made, and the compounding frequency. This formula is commonly used in financial planning and investment analysis.

  • RATE

    The RATE formula returns the interest rate per period of an annuity. This formula is often used in financial analyses to calculate the rate of return on an investment. It assumes that payments are made at regular intervals and that the interest rate remains constant throughout the duration of the annuity.

Learn More

You can learn more about the EFFECT Google Sheets function on Google Support.