How to Calculate Nominal Interest Rate
What is Nominal Interest Rate?
The nominal interest rate is the stated rate before accounting for compounding or inflation. It differs from the effective rate (which accounts for compounding) and the real rate (which accounts for inflation). Most loan rates are quoted as nominal annual rates.
Step-by-Step Guide
- 1Nominal rate = Periodic rate × Number of periods per year
- 2Effective rate = (1 + nominal/n)^n − 1
- 3Real rate ≈ Nominal rate − Inflation rate (Fisher equation: exact version is more complex)
- 4APR on loans is a nominal rate; APY on savings is the effective rate
Worked Examples
Input
Effective rate 10% · quarterly compounding
Result
Nominal rate ≈ 9.65%
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