key term - Nominal rate

Definition

The nominal rate is the interest rate stated on a loan or investment, not accounting for compounding within a specific period. It represents the percentage of interest charged or earned in one year without considering the effect of compounding.

5 Must Know Facts For Your Next Test

1. The nominal rate does not account for the effects of compounding.
2. It is often expressed as an annual percentage rate (APR).
3. Nominal rates are used in exponential functions to model financial growth or decay over time.
4. To find the effective interest rate, you need to consider the nominal rate and the number of compounding periods per year.
5. In equations, the nominal rate is usually represented by $r$.

Review Questions

Related terms

Effective Rate: The actual interest rate earned or paid on an investment or loan after accounting for compounding over a given period.

Compounding: The process where the value of an investment increases because earnings on an investment earn interest as time passes.

$e$ (Euler's Number): $e$ is approximately equal to 2.71828 and is used as the base for natural logarithms. It frequently appears in continuous compounding formulas.