Description

EffPrdRateλ() is one of the hard-to-remember-formula functions. Function names are easier to remember than formulas. This function calculates effective/equivalent compounding periodic interest rate from a given annual interest rate and compounding frequency. EffPrdRateλ uses this formula:

(1 + AnnualRate) ^ (1 / PeriodsPerYear) -1

Transparent:

5g functions' inner workings are visible in Name Manager or, better still, Microsoft's free add-in: Advanced Formula Environment and their formulas are 100% native Excel which should be familiar to all modelers. 

Simplified:

5g functions are simpler to enter than the formulas they replace.

Benefit:
Packaging difficult to remember formulas into functions prevents errors due to remembering incorrectly or mistyping the formula. Functions also prompt for inputs with human readable language so its less likely we will use the wrong assumptions.

Example

Below we are borrowing 10,000 at an APR of 8%. We want to know what the equivalent compounding period rate is. A beginner mistake would be to simply divide the annual rate by the number of compounding periods. In the animation we see that approach, when compounded, produces incorrect results when the compounding period is less than a year.