What is a nominal interest rate?
A nominal annual rate is the stated yearly rate before the effect of within-year compounding. It is commonly divided by the number of compounding periods to find the periodic rate.
Nominal rate = Compounding periods × [(1 + Effective rate)1 ÷ periods − 1]
Nominal rate vs. effective rate
The effective annual rate includes compounding, while the nominal rate does not. For accurate comparisons, make sure every offer uses the same rate convention and compounding frequency.
| Rate | Meaning |
|---|---|
| Nominal rate | Quoted annual rate before compounding |
| Periodic rate | Rate applied each compounding period |
| Effective rate | Annual result after compounding |
| Continuous rate | Nominal rate using continuous compounding |