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How to calculate the effective annual interest rate in Excel and Google Sheets
Topic:Finance basicsExcel & Google Sheets
=EFFECT(A2,B2)✓
Verified example
Computed by a real spreadsheet engine on the sample data below.
| Nominal Rate | Periods/Year |
| 0.12 | 12 |
=EFFECT(A2,B2)→0.1268250301
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Step by step
- 1In A2 enter the nominal annual interest rate as a decimal (e.g. 0.12 for 12%). In B2 enter the number of compounding periods per year (12 for monthly, 4 for quarterly, 365 for daily).
- 2In C2 enter =EFFECT(A2,B2). For 12% compounded monthly, EFFECT(0.12,12) returns approximately 0.1268 — meaning the true annual cost is 12.68%.
- 3Format C2 as a percentage to display the result clearly.
- 4Verify the result manually with =(1+A2/B2)^B2-1. It should match EFFECT exactly.
- 5Build a comparison table with different compounding frequencies in B2:B6 (1, 2, 4, 12, 365) and copy the EFFECT formula down to show how EAR increases with compounding frequency.
Tips
- EFFECT takes the nominal annual rate as input — do not pass the periodic rate. The nominal rate is stated on the loan or product documents.
- The inverse is NOMINAL(effective_rate, periods) — useful when a lender quotes an EAR and you need the nominal rate to feed into PMT or FV.
- For continuous compounding, use =EXP(A2)-1 instead of EFFECT. Daily compounding (365 periods) approaches but never quite reaches the continuous limit.
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Frequently asked
When should I use EAR vs the nominal rate?
Use EAR to compare products with different compounding frequencies — savings accounts, mortgages, credit cards. Use the periodic nominal rate as the input to payment functions like PMT and FV.
Does EFFECT work for continuous compounding?
No — EFFECT handles discrete compounding only. For continuous compounding, use =EXP(nominal_rate)-1.
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