Question

Please explain how to answer the following question using Excel:

What is the effective annual interest rate if the nominal, or quoted, rate is 6% compounded quarterly?

Answer 1

The effective annual rate(EAR) is the rate adjusted for the compounding of the stated period. This the rate at which the investor earns annually after taking the compounding effect. In the given scenario, it is given that the interest is compounded quarterly.

In Excel, use the below formula which gives the Effective Annual interest Rate. The formula is as follows:

EFFECT=(nominal_rate,npery)

In our case , nominal rate is 0.06 and npery is 4(since there will be 4 quarters in a year).

By using this formula you will get the required effective interest rate. It would be 0.0614 or 6.14%.