Formula and Use
The nominal interest rate formula calculates the annual nominal rate of interest (i), based on an effective annual rate (r). and a number of compounding periods in a year (m).
The Excel NOMINAL function can be used instead of the nominal interest rate formula, and has the syntax shown below.
i = NOMINAL(r,m)
Nominal Interest Rate Formula Example
If the effective rate is given as 5.116%, what is the annual nominal interest rate if compounding takes place monthly?
The nominal interest rate for the year is calculated using the nominal interest rate formula as follows:
Nominal interest rate = i = m x ((1 + r)1/m - 1) r = effective annual rate = 5.116% m = compounding periods in a year = 12 Nominal interest rate = 12 x ((1 + 5.116%)1/12 - 1) Nominal interest rate = 5.000%
The same answer can be obtained using the Excel NOMINAL function as follows:
Effective annual rate = NOMINAL(r,m) r = 5.116% m = 12 Nominal interest rate = NOMINAL(5.116%, 12) Nominal interest rate = 5.000%
The nominal interest rate formula is one of many annuity formulas used in time value of money calculations, discover another at the links below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.