Effective Interest Rate vs. Nominal Interest Rate
Calculate the relationship between effective and nominal interest rates. The nominal interest rate is typically expressed per year, while the effective interest rate applies to sub-periods like months, weeks, or days. Use this tool to convert between nominal and effective interest rates.
Effective Interest Rate vs. Nominal Interest Rate
An interest rate is only meaningful in the context of time - typically understood as per year (the nominal interest rate). With other periods of time like month, week, or day - the rate may be called the effective interest rate.
Formula 1: Nominal Interest Rate
i = (1 + ie)^n - 1
Where:
- i = nominal interest rate for the period
- ie = effective interest rate for the sub-period
- n = number of sub-periods
Formula 2: Effective Interest Rate
ie = (1 + i)^(1/n) - 1
Where:
- ie = effective interest rate for sub-periods
- i = nominal interest rate for the period
- n = number of sub-periods