Effective Interest Rate for any Time Period

The effective interest rate adjusts the stated nominal rate to allow for the effects of compounding over a specific time period, referred to as the effective period. Different compounding periods earn different amounts of interest and the effective interest rate allows comparisons to be made by converting these to an equivalent rate as if compounding took place once every effective period,

Effective Annual Rate (EAR)

The effective annual rate adjusts the stated nominal rate to allow for the effects of compounding. Different compounding periods earn different amounts of interest and the effective annual rate allows comparisons to be made by converting these to an equivalent rate as if compounding took place once at the end of the year, hence the alternative name of annual equivalent rate (AER).

Excel NOMINAL Function

The Excel NOMINAL function is used to calculate the nominal annual rate (i) required to give an effective annual rate (r), allowing for a given number of compounding periods each year (m). The effective rate allows for compounding, whereas the nominal rate does not allow for compounding.

Nominal Interest Rate Formula

The nominal rate formula calculates the nominal rate of interest for a year based on an effective rate (r), with compounding taking place a number of times a year (m).