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What is the Difference between nominal and effective interest rate?
Ronelboucher
Nominal interest rate is also defined as a stated interest rate. This interest works according to the simple interest and does not take into account the compounding periods.
Effective interest rate is the one which caters the compounding periods during a payment plan. It is used to compare the annual interest between loans with different compounding periods like week, month, year etc. In general stated or nominal interest rate is less than the effective one. And the later depicts the true picture of financial payments.
Wiki User
∙ 15y ago
Wiki User
∙ 14y agoThis is the difference between what you are told you will pay and the actual cost of the financing with points and loan closing cost included.
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Is the straight-line amortization or effective interest rate method better?
This method is preferred over the straight-line method of amortizing bond discount or bond premium. Amortization of a bond discount or premium is the difference between the interest expense and the nominal interest payment. The amortization entry is: Interest Expense (effective interest rate x carrying value) Cash (nominal interest rate x face value) Bond Discount (for the difference)
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A real interest rate and a nominal interest rate are quite similar. The only real difference between the two interest rates are that a nominal interest rate include the cost of inflation where as the real interest rate does not.
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Nominal InterestA nominal interest rate is the interest rate that does not compensate for inflation. This is used in relation to "effective interest rate" or "real interest rate."" Real Interest Rate = Nominal Interest Rate - Inflation Rate " Improvement suggested by Palash Bagchi.
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What does the nominal interest rate mean?
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