What Is the Nominal Interest Rate?

The nominal interest rate is the yearly rate as quoted, before compounding. A monthly rate is multiplied by 12, a daily rate by 365, to get the nominal annual rate. When interest is added more than once a year, the effective rate is higher than the nominal rate. The nominal rate also ignores inflation.

Where it appears in the formulas

With compounding, the nominal annual rate r is split over n periods a year: A = P × (1 + r/n)^(n × t), and the effective rate is (1 + r/n)^n − 1. The simple, compound and interest calculators show the nominal rate as a result. The loan calculator divides a yearly rate by 12.

Not the real rate

The real return takes inflation out of a nominal rate. A high nominal rate still loses purchasing power when inflation is higher.