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
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".