Nominal Interest

Also known as Annual Percentage Rate (APR), Annual Percentage Yield, Stated Interest, Stated Rate, Quoted Interest.
A nominal interest rate is an interest rate that has a compounding frequency of less than a year.
A nominal interest rate is quoted as a percentage WITH a compounding frequency.
The compounding frequency indicates the number of compounding periods in a year.
When the compounding frequency is one year this is called the effective interest rate.
When banks are charging interest they quote a nominal interest rate because it is lower than the 'actual' interest rate.
10% compounded monthly is not 10% a year but is actually 10.47% a year.


Excel Worksheet Function

NOMINAL - This function returns the nominal interest rate over a period given an effective (or annual) interest rate.

This table shows the nominal interest rates for a list of effective interest rates and compounding frequencies.


Comparing Nominal Interest Rates

When the compounding frequency is a year the nominal interest rate is the same as the effective interest rate.
Nominal interest rates are not comparable unless their compounding frequencies are the same.


Confusing Words

10% compounded quarterly, means 25% every quarter
10% quoted as a 6-month investment, means 5% every six months
The reason for the annualising is to make them look "approximately" comparable



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