How to Convert a Nominal Rate to an Effective Rate with EFFECT in Excel

Compare savings accounts and a store card fairly by turning quoted rates with different compounding into true annual rates.

You will learn to

• Turn a nominal rate into an effective annual rate
• See the true cost of daily-compounded credit
• Pick the better account by effective rate

How it works

EFFECT(nominal_rate, npery) converts a quoted annual rate into the effective annual rate (APY) once compounding is included. 4.80% compounded monthly is =EFFECT(4.8%,12), about 4.91%.

Rates compounded more often are worth more than they look, so only effective rates can be compared fairly. The same applies to debt: a 24.99% credit card compounded daily really costs about 28.4% a year.

=EFFECT(B2,C2)