Difference between revisions of "Documentation/How Tos/Calc: EFFECTIVE function"
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=== Syntax: === | === Syntax: === | ||
| − | <tt>'''EFFECTIVE( | + | <tt>'''EFFECTIVE(nom_rate; num)'''</tt> |
| − | : <tt>''' | + | : <tt>'''nom_rate'''</tt>: the nominal interest rate. |
| − | : <tt>'''num'''</tt>: the number of times interest is credited / compounded during the period that <tt>''' | + | : <tt>'''num'''</tt>: the number of times interest is credited / compounded during the period that <tt>'''nom_rate'''</tt> 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. | 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: | The formula used is: | ||
| − | effective_rate = ( (1 + | + | effective_rate = ( (1 + nom_rate/num)^num ) - 1 |
=== Example: === | === Example: === | ||
Revision as of 05:59, 12 July 2008
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.
See also:
EFFECT_ADD, NOMINAL, NOMINAL_ADD
Derivation of Financial Formulas
Issues:
- According to the draft ODFF standard, this function will be replaced with a new EFFECT function.
- 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.
