Contents
Time Value of Money
Annuities
Perpetuities
Kinds of Interest Rates
Future Value of an Uneven Cash flow
Probability Distribution
Standard Deviation
CAPM
Security Market Line
Bond Valuation
Stock Valuation
Cost of Capital
The Balance Sheet
Capital Budgeting
Hall of Fame
Credit Report
Forex
401K
ETFs
Futures
Inflation
IPOs
Mergers
Online Scams
Calculators
Financial Terms
Scientific Terms
Military Terms
Financial Charts
Unemployment
Fuel Mileage
Sports Finance
Energy Efficiency
Japanese
Chinese
हिन्दी
العربية
Espanol
Francias
Portuguese
Disclaimer




Kinds of Interest Rates




Let's say I give you a credit card and the interest rate on the card is 3% per month. What is the annual rate that you are actually charged?? 36%?? Well, no. It's actually 42.57%.

Nominal Rate Nominal means "in name only". This is sometimes called the quoted rate.
Periodic Rate The amount of interest you are charged each period, like every month.
Effective Annual Rate The rate that you actually get charged on an annual basis. Remember you are paying interest on interest.


In the example
  • The Nominal Rate is 36%.
  • The Periodic Rate is 3% (you are charged 3% interest on your balance every month)
  • The Effective Annual Rate is 42.57%
Nominal Rate = Periodic Rate X Number of Compounding Periods
Effective Annual Rate = (1+ i / m)m -1
  • m = the number of compounding periods
  • i = the nominal interest rate

O.K., so let's try the example again.

  • Effective Annual Rate = (1+ i / m)m -1
  • Effective Annual Rate = ( 1 + .36 / 12 )12 -1
  • Effective Annual Rate = (1.03)12 - 1
  • Effective Annual Rate = (1.4257) -1
  • Effective Annual Rate = .4257
  • Effective Annual Rate = 42.57 %
Financial Terms: A B C D E F G H I J K L M N O P Q R S T U V W Y Z







About the author

Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

Copyright © 1997 - 2009 by Mark McCracken , All Rights Reserved