EFFECT Function in Excel: Real Annual Rate With Compounding

EFFECT Function in Excel: Real Annual Rate With Compounding featured illustration

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⏱ 2 min readUpdated 5 October 2026

FinancialLevel: ExpertAvailable in: Excel 2007+

In this article
  1. Syntax
  2. Examples
  3. Example 1
  4. EFFECT in practice
  5. Where you will use it
  6. Worked example
  7. Mistakes people make
  8. Related functions
  9. Continue learning

EFFECT converts a nominal annual rate into the effective rate after compounding. NOMINAL does the reverse.

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Syntax

=EFFECT(nominal_rate, npery)
Argument What it means
npery Compounding periods per year (4 for quarterly FDs).

Examples

Example 1

=EFFECT(7%, 4)

A 7% FD compounded quarterly yields about 7.19% a year.

EFFECT in practice

Where you will use it

  • Effective annual rate of an FD compounded quarterly
  • Compare loans with different compounding
  • Credit-card APR to effective

Worked example

NominalPeriods/yearFormulaResult
0.074=TEXT(EFFECT(A2,B2),"0.00%")7.19%
0.3612=TEXT(EFFECT(A3,B3),"0.00%")42.58%
0.0851=TEXT(EFFECT(A4,B4),"0.00%")8.50%

Results calculated in Excel.

Mistakes people make

MistakeWhat to do instead
Comparing nominal ratesAlways compare effective rates
Periods4 = quarterly, 12 = monthly

NOMINAL · RATE

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