Effective and Nominal Interest Rates

Relationship between effective and nominal interest rates

Interest rate is only meaningful in the context of time - in general is understood as - per year - which may be called

  • the nominal interest rate

With other periods of time than year - like month, week, or day - the interest rate may be called 

  • the effective interest rate 

Calculating Nominal Interest Rate

Nominal interest rate for a period with effective interest rates for it's subperiods can be calculated as

i = (1 + ie)n - 1            (1)

where

i = nominal interest rate for the period

ie = effective interest rate for the subperiod

n = number of subperiods

Example - Nominal interest rate with Effective monthly interest rates

Nominal interest rate (per year) with monthly effective rates of 1% can be calculated as

in = (1 + 0.010)12 - 1

    =  0.127

    = 12.7%

Calculating Effective Interest Rate

Effective interest rate for the subperiods of a period can be calculated as

ie = (in + 1)1/n - 1        (2)

Example - Nominal interest rate with Effective monthly interest rates

Effective interest rate per month with a nominal rate of 10% can be calculated as

ie = (0.1 + 1)1/12 - 1

    =  0.00797

    = 0.797%

Related Topics

  • Economics - Engineering economic concepts - cash flow diagrams, discount rate, internal rate of return - IRR, income taxes, inflation

Related Documents

Tag Search

  • en: effective nominal interest rates

Search the Engineering ToolBox

- "Search is the most efficient way to navigate the Engineering ToolBox!"

Engineering ToolBox - SketchUp Extension - Online 3D modeling!

3D Engineering ToolBox Extension to SketchUp - add parametric components to your SketchUp model

Add standard and customized parametric components - like flange beams, lumbers, piping, stairs and more - to your SketchUp model with the Engineering ToolBox - SketchUp Extension/Plugin - enabled for use with the amazing, fun and free SketchUp Make and SketchUp Pro. Add the Engineering ToolBox extension to your SketchUp from the Sketchup Extension Warehouse!

Translate the Engineering ToolBox!
About the Engineering ToolBox!

close