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# Effect

> Use the Sigma Effect function to return the effective annual interest rate.

The **Effect** function returns the effective annual interest rate.

Lending institutions advertise the *nominal* rate of their loans. The nominal interest rate does not take into account the effect of compounding. The *effective* interest rate takes the compounding period into account, and it is a more accurate measure of interest charges.

## Syntax

```
Effect(nominal_rate, num_per_year)
```

Function arguments:

|                    |                                                                             |
| :----------------- | :-------------------------------------------------------------------------- |
| **nominal\_rate**  | The nominal interest rate as a decimal (for example, for 7%, input `0.07`). |
| **num\_per\_year** | The number of compounding periods per year.                                 |

## Notes

The general formula for the **Effect** function is:\
![Effect function](https://files.buildwithfern.com/sigma.docs.buildwithfern.com/8a5a87e592d16bd2198898b7dbcb146fffaf79c57bd1a0f380376e8e95e776b8/assets/docs-images/6cee9da-function-effect.png)

## Examples

```
Effect(.0678, 12)
```

The effective annual interest rate for an effective rate of 6.78%, paid 12 times a year (monthly). This example returns 7.00%.

```
Nominal(0.677, 26)
```

The nominal annual interest rate for an effective rate of 6.77%, paid 26 times a year (bi-weekly). This example returns 7.00%.

```
Effect(0.1, [Number of Periods])
```

Explore how the the effective annual interest rate changes when the nominal interest rate is 10% applies to investments with a different number of periods.

![](https://files.buildwithfern.com/sigma.docs.buildwithfern.com/7e773dca9021e1be0befd8013603d329ba3f8b512ca0019412e029a3fbaa629f/assets/docs-images/0feb8b8-image.png)

## Related resources

* [Nominal](/docs/nominal)
* <a href="https://support.microsoft.com/en-us/office/effect-function-910d4e4c-79e2-4009-95e6-507e04f11bc4" target="_blank" rel="noopener noreferrer">
    EFFECT function in Microsoft documentation
  </a>