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EFFECT & NOMINAL

Finance

Convert a quoted rate into the one you actually pay, and find out what an early-payment discount really costs.

Difficulty

Good
Excel file

1What is it?

A rate quoted as 12% compounded monthly isn't 12% — it's 12.68%, because each month's interest starts earning too. EFFECT converts a nominal annual rate into that effective one; NOMINAL goes back the other way. The reason this matters outside a textbook is supplier terms: 2/10 net 30 — two percent off if you pay in ten days instead of thirty — looks like a 2% discount and is closer to a 37% annual rate for the twenty days of cash it costs you. That's usually the cheapest or most expensive financing decision in a small business, and nobody prices it.

2What it looks like

EFFECT(nominal_rate, npery)   ·   NOMINAL(effect_rate, npery)
nominal_rate
The rate as quoted, per year.
npery
How many times a year it compounds — 12 monthly, 4 quarterly, 365 daily. Truncated to an integer.
effect_rate
For NOMINAL: the effective annual rate you want to work back from.

3When you use it

  • Compare a monthly-compounded loan against a quarterly-compounded one honestly.
  • Price supplier terms: what taking 2/10 net 30 is really worth annualised.
  • Turn a card processor's monthly rate into the annual number for a board pack.

4See it in action

Change the inputs — the formula and result update live. Prefer the real thing? Download the Excel file and open it in Excel.

Start simple: what a quoted rate really costs · 1 of 2

Compounding turns 12% into something more. Change how often it compounds.

C2
fx
=EFFECT(B2/100, B3)Quoted: 12.00%
ABC
1InputValueResult
2Quoted rate %Quoted: 12.00%
3Compounds / yearEffective: 12.68%
4The gap compounding adds: 0.68 points

The lime cell holds the formula — click it (or any cell) to see its contents in the bar above, just like Excel. Edit the blue cells to watch it recompute.

5Common errors

#NUM!npery is less than 1, or the rate is zero or negative.

Fix: Compounding happens at least once a year, and the rate has to be positive.

#VALUE!Either argument is text — often a rate pasted in as "12%".

Fix: Convert it to a number first; see VALUE.

Answer looks identical to what you passed innpery is 1, so there's nothing to compound.

Fix: That's correct — annual compounding means nominal and effective are the same.

6Better functions & alternatives

  • RATE — Backs a rate out of a payment schedule. EFFECT converts a rate you already have.
  • FV — Shows the same effect as an amount rather than a rate.

Want EFFECT & NOMINAL already wired into a model? Wauvel's free tools download as branded, formula-driven Excel.

Learn the moves here — or let Wauvel run them on your numbers.

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