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26 February 2021 Nominal Vs Effective Rate

The document discusses nominal rates, annual percentage rates, and quoted rates for credit cards and how interest is charged. It also covers how the effective interest rate is always higher than the nominal rate if interest is compounded more than once per year, and equal if compounded just once per year.

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Arif Rahman
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29 views1 page

26 February 2021 Nominal Vs Effective Rate

The document discusses nominal rates, annual percentage rates, and quoted rates for credit cards and how interest is charged. It also covers how the effective interest rate is always higher than the nominal rate if interest is compounded more than once per year, and equal if compounded just once per year.

Uploaded by

Arif Rahman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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26 February 2021

Nominal Vs Effective Rate

 Nominal Rate (NR), Annual Percentage Rate (APR), Quoted Rate (QR)
 Effective rate has not given anywhere.

Credit Card: APR 15%, they charged interest rate monthly basis or daily basis or
yearly basis? Which one?

 If the interest rate compounding is more than once in a year the effective
rate is always higher than Nominal rate
 If the interest rate compounding is just once in a year then effective rate is
equal to the Nominal rate

 m: Number of compounding of the quoted rate. For example: 10% QR,


compounded semiannually, so, m=2. For example: 10% QR, compounded
monthly, so, m=12.
 f: If the we want to know the effective rate other than annually, for
example: Effective monthly rate, then f=12, effective quarterly rate, f=4

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