EFFECTIVE() calculates the effective annual interest rate on a loan. This function is the opposite of NOMINAL().
Use EFFECTIVE() 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 you want to know the equivalent annual rate, taking compound interest into account. For more information, see Financial Functions.
EFFECTIVE(nominal_rate,periods)
| • | nominal_rate is the nominal annual interest rate. |
| • | periods is the number of compounding periods per year and is truncated to an integer. |
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, Analyzer returns an error.
If you know that your credit card is charged 18%, compounded monthly on overdue balances, to calculate the effective annual rate, specify:
EFFECTIVE(.18,12) = .19561817
This shows that the effective annual rate is 19.561817%.