Nominal Interest Rate And Effective Interest Rate Calculator
Nominal Interest Rate & Effective Interest Rate Calculator
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What is Real Interest Rate
Real Interest rate is the Real Interest Return investor / Lender get after factoring Inflation into Consideration.
Formulae :
Nominal Interest Rate =Real Interest Rate + Inflation Rate
Case Study :
James is a Bond Investor , he is looking for a Bond with annual return of 5%
The Current Inflation Rate is 2%
Real Interest Rate = 5%
Inflation Rate = 2%
Nominal Interest Rate = 5% + 2%
Nominal Interest Rate = 7%
James should look for a Bond Contract with Nominal Rate 7%
What is Nominal Interest Rate
Nominal Interest Rate refers to the rate of interest before considering Inflation, it also can be explained as the interest rate specified in the loan contract without adjusting for compounding
Formulae :
Nominal Interest Rate =[ (1 + Effective Interest Rate)1/Compound Time Annually – 1] x Compound Time Annually
Case Study :
Bank A Offers an Effective Interest Rate 5% , Interest being Compounded Monthly
Nominal Interest Rate =[ (1 + 5%)1/12 – 1] x 12
Nominal Interest Rate = 4.88%
What is Effective Interest Rate
Calculated based on the nominal interest rate being Compounded n times ( Monthly , Quarterly , Yearly )
Formulae :
Effective Rate = (1 + Nominal Interest Rate/Compound Time Annually )Compound Time Annually – 1
Case Study :
Bank A Offers a Nominal Interest Rate 5% , Interest being Compounded Monthly
Effective Rate = (1 + 5%/12 )12 – 1
Effective Rate = 5.116%
Effective Period Rate = 5% / 12 = 0.05 / 12 = 0.4167%