Nominal interest rate: Difference between revisions

The nominal interest rate (also known as an Annualised Percentage Rate or APR) is the periodic interest rate multiplied by the number of periods per year. For example, a nominal annual interest rate of 12% based on monthly [[Compound interest|compounding]] means a 1% interest rate per month (compounded).<ref> Charles Moyer, James R. McGuigan, William J. Kretlow. ''Contemporary Financial Management'', Tenth Edition. Thomson-South-Western, Mason, Ohio, 2006 [httphttps://books.google.com/books?vid=ISBN0324289081&id=c8fOHam2S-MC&pg=PA163&lpg=PA163&ots=rEQQBn5LEU&dq=nominal+interest&sig=YsHcq0y9ZiOODUT2fZQwf7pxX_E pg. 163].</ref> A nominal interest rate for compounding periods less than a year is always lower than the equivalent rate with annual compounding (this immediately follows from elementary algebraic manipulations of the formula for compound interest). Note that a nominal rate without the compounding frequency is not fully defined: for any interest rate, the [[effective interest rate]] cannot be specified without knowing the compounding frequency ''and'' the rate. Although some conventions are used where the compounding frequency is understood, consumers in particular may fail to understand the importance of knowing the effective rate.