Nominal interest rate

The nominal interest rate is the stated annual rate before adjustment for compounding frequency or inflation, equal to the periodic rate times periods per year.

ByHoang TruongUpdated July 3, 2026

FrameworkTime value of money

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A bank quotes a nominal rate of 6% compounded monthly, which is really a periodic rate of 0.5% applied twelve times a year. Compounding that periodic rate through the year — (1.005)^12 − 1 — gives an effective annual rate of 6.17%. On €1,000, that is €61.70 of real growth, not the €60 the nominal rate alone would suggest.

Where it fits

TopicTime Value of MoneyCoreSubjectCorporate FinanceCore

The formula

LaTeX

r_{nom} = r_{period} \times m

Variables

$r_{n} o m$: stated nominal annual interest rate (decimal)
$r_{p} er i o d$: interest rate per compounding period (decimal)
$m$: number of compounding periods per year

A bank quoting '6% compounded monthly' uses r_period = 0.5% and m = 12. Nominal rates with different compounding frequencies cannot be compared directly; convert to the effective annual rate first.

LaTeX

(1 + r_{nom}) = (1 + r_{real}) \times (1 + \pi)

Variables

$r_{n} o m$: nominal interest rate per period
$r_{r} e a l$: real interest rate per period (inflation-adjusted)
$π$: inflation rate over the same period

The Fisher equation. The approximation r_real ≈ r_nom − π is adequate when inflation is low; it understates r_real slightly at higher inflation levels.

Check yourself

PracticeCORE

Account P offers a 9 per cent annual rate compounded monthly. Account Q offers 9.1 per cent compounded annually. An investor wants the higher effective annual return. Which account should they choose, and why does the nominal rate alone not resolve the comparison?

Select an answer to check your understanding.