FormuladrillEffective annual rate
An Excel formula exercise from Formuladrill. Solve it with a formula bar on a live sheet in your browser, and it is checked the moment you submit.
The task
A card quotes the nominal annual rate in B1, compounded the number of times per year in B2. Work out the effective annual rate in B3: how much the balance really grows in one year.
What this exercise teaches
The effective rate is always above the nominal rate when interest compounds more than once a year, which is why lenders quote the nominal one. It is the FV idea with 1 as the starting amount.
A hint if you get stuck
Grow 1 by the rate per period, (1 + rate / periods), raise it to the power of the number of periods, then subtract 1.
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