What Is an Interest Rate?
Definition
Interest Rate: The interest paid or charged on a principal for a period, as a percentage of that principal. It is usually quoted per year; a monthly or daily rate can be turned into a yearly one.
An interest rate is the interest paid on a principal for a period, as a share of that principal. It is usually quoted per year; loan and credit card rates are often quoted per month. A monthly rate times 12, or a daily rate times 365, gives the nominal annual rate.
Where it appears in the formulas
Simple interest uses interest = P × r × t and compound interest A = P × (1 + r/n)^(n × t), where r is the annual rate as a decimal. A rate of 3% a month is a nominal 36% a year: 50,000 TRY at that rate becomes 68,000 TRY in one year with simple interest.
Nominal and effective rate
The quoted annual rate is the nominal rate. If interest is added more than once a year, the real yearly return, the effective rate, is higher: a nominal 36% a year compounded monthly equals an effective 42.58%.