Calculating nominal interest rate from effective
The effective period interest rate is equal to the nominal annual interest rate divided by the number of periods per year n: Effective Period Rate = Nominal Annual Rate / n. Effective annual interest rate calculation. The effective interest rate is equal to 1 plus the nominal interest rate in percent divided by the number of compounding In the same way, you can also calculate the effective interest rate from the nominal rate (using the 2 nd calculator). Importance of Understanding Nominal and Effective Interest Rate From our above analysis, you are now aware of the crucial difference between nominal and effective interest rate based on compounding. The nominal interest rate is calculated in the following way, where i is the nominal rate, r the effective annual rate, and n the number of compounding periods per year (for example, 12 for monthly compounding): i = n × ((1 + r) 1/n - 1) When the frequency of compounding is increased up to infinity the calculation will be: i = ln(r + 1) Related