EFFECTIVE( ) function

Returns the effective annual interest rate on a loan.

Syntax

EFFECTIVE(nominal_rate, periods)

Parameters

nominal_rate

Numeric. The nominal annual interest rate.

periods

Numeric. The number of compounding periods per year. This parameter should be specified as an integer. If it is specified as a decimal value, it is truncated to an integer value.

Output

Numeric.

Remarks

You can use this function to determine the effective annual interest rate when you know the stated interest rate and the number of compounding periods. For example, if you know the interest rate charged on your credit card is compounded monthly, but want to know the equivalent annual rate, taking compound interest into account, you would use this function.

The result will be returned to eight decimal places accuracy, that is, 0.12345678 or 12.345678%.

If you enter an obviously invalid parameter such as a negative interest rate, ACL returns an error.

This function is the opposite of the NOMINAL( ) function.

Example

Calculating the effective interest rate for a credit card

The effective interest rate for a credit card charged 18%, compounded monthly on overdue balances, can be calculated using the EFFECTIVE( ) function.

EFFECTIVE(0.18, 12)

returns 0.19561817. This shows that the effective annual rate is 19.561817%.

Related reference
NOMINAL( ) function


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