Effective Interest

Known as Annual Percentage Yield (APY) in the US.
Known as Annual Effective Rate (AER) in the UK.
An effective interest rate is an interest rate that has a compounding frequency of one year.
This is the annual interest rate that you will earn (when you invest or save) taking compounding into consideration.
An effective interest rate is quoted as a percentage.

Excel Worksheet Function

EFFECT - This function returns the effective (or annual) interest rate given a nominal interest rate.

This table shows the effective interest rates for 10% with different compounding frequencies.

Comparing Effective Interest Rates

Effective interest rates can be easily compared.
If you have two interest rates with different compounding frequencies, they need to be converted into effective interest rates before they can be compared.
10% compounded monthly is not the same as 10% compounded annually.
10% every month is equivalent to 10.47% a year.
10% compounded daily is equivalent to 10.52% a year.

Other Information

There is also Equivalent Annual Rate (EAR) although this is only when describing loans and borrowing.