Difference between revisions of "Documentation/How Tos/Calc: EFFECTIVE function"

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{{DISPLAYTITLE: EFFECTIVE function}}
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== EFFECTIVE ==
 
== EFFECTIVE ==
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=== Syntax: ===
 
=== Syntax: ===
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<tt>'''EFFECTIVE(rate; num)'''</tt>
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<tt>'''EFFECTIVE(nom_rate; num)'''</tt>
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: <tt>'''rate'''</tt>: the nominal interest rate.
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: <tt>'''nom_rate'''</tt>: the nominal interest rate.
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: <tt>'''num'''</tt>: the number of times interest is credited / compounded during the period that <tt>'''rate'''</tt> applies to.
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: <tt>'''num'''</tt>: the number of times interest is credited / compounded during the period that <tt>'''nom_rate'''</tt> applies to.
  
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If an investment has a nominal rate, say for a year, but interest is paid and credited say each quarter, the interest paid each quarter will itself start earning interest. This increases the effective value. This function returns the effective rate - that is, the rate that would have to be paid at the end of the (say) year to give the same return.
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:If an investment has a nominal rate, say for a year, but interest is paid and credited say each quarter, the interest paid each quarter will itself start earning interest. This increases the effective value. This function returns the effective rate - that is, the rate that would have to be paid at the end of the (say) year to give the same return.
  
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The formula used is:
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:The formula used is:
  
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effective_rate = ( (1 + rate/num)^num ) - 1
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:effective_rate = (1 + nom_rate/num)<sup>num</sup> - 1
  
 
=== Example: ===
 
=== Example: ===
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:  returns approximately <tt>'''6.14%'''</tt>, which is the effective rate of an investment with a nominal rate of 6% per annum, compounded quarterly.
 
:  returns approximately <tt>'''6.14%'''</tt>, which is the effective rate of an investment with a nominal rate of 6% per annum, compounded quarterly.
  
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=== See also: ===
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=== Issues: ===
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[[Documentation/How_Tos/Calc: EFFECT_ADD function|'''EFFECT_ADD''']],
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* The calculation assumes that interest is credited at the end of exactly equal periods. In reality, different quarter-years, for example, have different numbers of days.
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[[Documentation/How_Tos/Calc: NOMINAL function|'''NOMINAL''']],
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[[Documentation/How_Tos/Calc: NOMINAL_ADD function|'''NOMINAL_ADD''']]
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'''[[Documentation/How_Tos/Calc: Derivation of Financial Formulas|Derivation of Financial Formulas]]'''
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{{SeeAlso|EN|
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* [[Documentation/How_Tos/Calc: EFFECT_ADD function|EFFECT_ADD]]
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* [[Documentation/How_Tos/Calc: NOMINAL function|NOMINAL]]
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* [[Documentation/How_Tos/Calc: NOMINAL_ADD function|NOMINAL_ADD]]
  
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[[Documentation/How_Tos/Calc: Financial functions|'''Financial functions''']]
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* [[Documentation/How_Tos/Calc: Derivation of Financial Formulas|Derivation of Financial Formulas]]
  
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=== Issues: ===
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* [[Documentation/How_Tos/Calc: Financial functions|Financial functions]]}}
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* According to the draft ODFF standard, this function will be replaced with a new '''EFFECT''' function.
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[[Category: Documentation/Reference/Calc/Financial functions]]
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* The calculation assumes that interest is credited at the end of exactly equal periods. In reality different quarter-years, for example, have different numbers of days.
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Latest revision as of 10:53, 31 January 2024

EFFECTIVE

Returns the effective compounded interest rate given a nominal interest rate.

Syntax:

EFFECTIVE(nom_rate; num)

nom_rate: the nominal interest rate.
num: the number of times interest is credited / compounded during the period that nom_rate applies to.
If an investment has a nominal rate, say for a year, but interest is paid and credited say each quarter, the interest paid each quarter will itself start earning interest. This increases the effective value. This function returns the effective rate - that is, the rate that would have to be paid at the end of the (say) year to give the same return.
The formula used is:
effective_rate = (1 + nom_rate/num)num - 1

Example:

EFFECTIVE(6%; 4)

returns approximately 6.14%, which is the effective rate of an investment with a nominal rate of 6% per annum, compounded quarterly.

Issues:

  • The calculation assumes that interest is credited at the end of exactly equal periods. In reality, different quarter-years, for example, have different numbers of days.


See Also
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