# Effect

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.

**Effect** is part of the set of financial functions that Sigma supports.

## Syntax

Effect(nominal_rate, num_per_year)

The **Effect** function has the following arguments:

- nominal_rate
- Required.
- Nominal interest rate
- To use 7%, use the value 0.07.
- num_per_year
- Required.
- Number of compounding periods per year

The general formula for the **Effect** function is:

## 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.

## Related functions

- Nominal
- EFFECT function in Microsoft documentation