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Hello,
I don’t seem to grasp the difference between effective annual rate of interest and Nominal rates of interest
I was wondering if you could help me with this.
Suppose the the interest is 1% per month.
The effective annual rate of interest is (1.01^12) – 1 = 0.1268 (or 12.68%) and this is the true annual interest rate.
The nominal rate is simply 12 x 1% = 12%.
(In the past, companies lending money at 1% per month would say in their adverts that the interest was therefore 12% per year. However this was misleading and so now (certainly in the UK) they have to state the real annual rate of interest of 12.68% per year.)
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