Nominal Interest Rate
Reverse-engineer your interest rates. This tool calculates the 'stated' rate required to produce a specific effective yield, helping you understand lender quotes.
What is a nominal interest rate?
The nominal interest rate is the periodic interest rate multiplied by the number of periods per year. It is the interest rate before taking the effects of compounding into account.
How is it different from the effective rate?
The effective rate (EAR) accounts for compounding within the year, while the nominal rate does not. The EAR is what you actually earn or pay, and it is always higher than or equal to the nominal rate.
How do I calculate nominal rate from EAR?
The formula is: r = n × [ (1 + EAR)^(1/n) - 1 ], where r is the nominal rate, EAR is the effective annual rate, and n is the number of compounding periods per year.
Why do banks use nominal rates in advertising?
Banks often use nominal rates because they appear lower than the effective rate for loans (making the debt look cheaper) or higher for savings products when they quote the yield. Always look for the APR or EAR for a true comparison.