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There are two different methods which are used to quote interest rates:

 
 
NOMINALThe nominal rate equivalent to a given annual effective with a given compounding frequency for a nominal rate.
EFFECTThe annual interest rate given a nominal rate and compounding frequency.
 


 

Nominal Rate

 
 

(e.g. APR 12%, compounded monthly)

 
 

An annual rate with a compounding frequency.

 
 

This means that 1% is charged every month.

 

 

Effective Rate

 
 

(e.g. 10% annual)

 
 

An annual rate with no compunding frequency.

 
 

This means that 10% is charged every year.

 

 

An interest rate quotes using one method can be easily converted to the other

 
 

Most banks and financial institutions quote interest on a nominal basis, compounded monthly.

 




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