By definition, the nominal interest rate is the rate of interest before you take into account inflation. You can calculate this value using this nominal interest rate calculator. In some cases, nominal may even refer to the stated or advertised interest rates on loans without taking the compounding of interest and the fees into account. Finally, a nominal rate may even refer to the federal funds rate or the rate of interest set by the Federal Reserve.
How to use the nominal interest rate calculator?
Even if you know how to compute for the nominal interest rate using the nominal interest rate formula, this nominal interest rate calculator. This is an online tool that’s easy to use and will provide you with the results you need quickly. To use the calculator, here are the steps to follow:
- First, input the percentage value of the Effective Rate per period.
- Then input the Compounding value per period.
- Finally, input the value for the Number of Periods.
- After entering all of the values, the nominal interest rate calculator will automatically generate for you the values of the Nominal Rate per Period, the Effective Rate for 5 Years, and the Rate per Compounding Interval.
What does nominal interest rate mean?
The nominal interest rate refers to the percentage yield of a loan or security without taking inflation into account. This means that it’s the actual rate that a borrower would pay to a lender to utilize their funds.
How do you calculate nominal interest rate?
The nominal interest rate which is also known as the annualized percentage rate or the APR is the interest that you would have to pay for before considering inflation. With this in mind, it is, therefore, essential for you to compute for the nominal interest rate of loans and credit cards. In doing this, you can find out which ones have the lowest cost using a single method.
You can make the computations manually or use this nominal interest rate calculator to make things easier. Also, it’s important for you to differentiate between the nominal and the real interest rate. The latter accounts for the wearing down of purchasing power because of inflation. You can calculate the nominal interest rate using the following formula:
NIR = RIR + IR
NIR refers to the nominal interest rate
RIR refers to the real interest rate
IR refers to the inflation rate
You can also use the same equation but move the values around if you want to compute for the real interest rate that you’re receiving or paying:
RIR = NIR – IR
To better understand how to use NIR, keep these three key concepts in mind:
Average daily balance
This refers to the average amount that you owe an entity in a monthly cycle of billing. This is the sum of the balances each day divided by the number of days in the given cycle.
Daily periodic rate
This refers to the interest rate that gets applied to a daily balance each day. It’s equal to the nominal interest rate divided by 365 or how many days there are in a year. For instance, a NIR with a 15% value and a year with 365 days would give you a daily periodic rate of 0.041%.
This refers to the daily interest that gets charged and added to the daily balance so that you can get the daily balance of the next day. This means that you’re paying for interest on interest until you’ve paid off the whole balance. However, NIR doesn’t take into account the impact of compounding. Because of daily compounding, the actual interest rate will always go beyond the NIR.
How do you calculate effective annual interest rate?
The effective annual rate of the EAR refers to the interest rate that gets adjusted over a specific period to take compounding into account. In other words, it’s the interest rate that investors can either pay or earn in one year after taking compounding into consideration.
The EAR is also known as the annual equivalent rate, the effective interest rate, the annual percentage yield or the effective rate. To compute for the EAR, you can use this formula:
EAIR = (1 + i/n)n – 1
i refers to the stated annual interest rate
n refers to the number of compounding periods
How do you calculate monthly interest rate?
If you’re able to calculate interest every month, this means that you have a very relevant skill. Often, you may see interest rates quoted as annual percentages. Sometimes though, you may want to know the exact numbers. To help explain this, let’s have an example:
Most of the time, we think in terms of costs per month. We have our monthly food costs, monthly car payments, monthly utility bills, and so on. Usually, the interest is also a monthly event, and the recurring calculations would add up to large numbers over a given period of time. Whether you’re earning or paying interest, how you would convert the annual rates to monthly rates is essentially the same. Here are some steps to follow:
- First, calculate the monthly interest rate. This is a simple process, and all you have to do is divide your annual interest rate by 12 since each year has 12 months.
- Then convert the percentage form to a decimal form to finalize the steps.
- Divide the value by how many time periods there are. So, you began with a single annual time period, and you need to convert into 12 periods for each of the 12 months. You can use this same concept for when you want to convert into different time periods:
- For daily interest rates, divide the annual rate by 365 or 360.
- For quarterly interest rates, divide the annual rate by 4.
- For weekly interest rates, divide the annual rate by 52.
- Here’s an example: let’s say that you pay a monthly interest at 10% each year. How much would your monthly interest be and how much will you have to pay if you borrow $100? Here is the computation:
10/100 = 0.1 each year
0.10/12 months = .0083
0.0083 x $100 = $0.83
0.0083 x 100 = 0.83% each year