# Nominal Interest Rate And Effective Interest Rate Calculator

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## What is Real Interest Rate

Real Interest rate is the Real Interest Return   investor / Lender get after factoring Inflation into Consideration.

Formulae :

Nominal Interest Rate =Real Interest Rate + Inflation Rate

Case Study :

James is a Bond Investor , he is looking for a Bond with annual return of 5%

The Current Inflation Rate is 2%

Real Interest Rate  = 5%

Inflation Rate = 2%

Nominal Interest Rate  = 5% + 2%

Nominal Interest Rate = 7%

James should look for a Bond Contract with Nominal Rate 7%

## What is Nominal Interest Rate

Nominal Interest Rate refers to the rate of interest before considering Inflation, it also can be explained as the interest rate specified in the loan contract without adjusting for compounding

Formulae :

Nominal Interest Rate =[ (1 + Effective Interest Rate)1/Compound Time Annually – 1] x Compound Time Annually

Case Study :

Bank A Offers an Effective Interest Rate 5% , Interest being Compounded Monthly

Nominal Interest Rate =[ (1 + 5%)1/12 – 1] x 12

Nominal Interest Rate  = 4.88%

## What is Effective Interest Rate

Calculated based on the nominal interest rate  being Compounded n times ( Monthly , Quarterly , Yearly )

Formulae :

Effective Rate = (1 + Nominal Interest Rate/Compound Time Annually )Compound Time Annually  – 1

Case Study :

Bank A Offers a Nominal  Interest Rate 5% , Interest being Compounded Monthly

Effective Rate = (1 + 5%/12 )12  – 1

Effective Rate = 5.116%

Effective Period Rate = 5% / 12 = 0.05 / 12 = 0.4167%