Nominal and Effective

Interest Rate
• Nominal rate of Interest = specifies rate of interest and a number of interest
periods in one year
𝒓
𝒊= where:
𝒎 𝑖 = rate of interest per interest period
r = nominal rate of interest
m = number of compounding periods per year

𝑟 𝑚𝑛 Note:
𝐹 = 𝑃(1 + )
𝑚 annual m=1
𝑟 −𝑚𝑛 semi annual m=2
P = 𝐹(1 + 𝑚
) quarterly m=4
bimonthly m=6
monthly m = 12
• Effective rate of Interest = actual interest rate of an investment in one year or
the interest rate of any compounding that will give the same accumulation as
computed compounded annually.

E.I = (𝟏 + 𝒊)𝒎 −𝟏 or
𝒓 𝒎
E.I= (𝟏 + 𝒎
) −𝟏
Sample Problem:
1. What is the equivalent nominal interest rate compounded quarterly of 12% compounded semi
annually?
Sample Problem:
1. Find the amount at the end of the two years and seven months if P1000 is
invested at 8% compounded quarterly. Using simple interest for any less than
a year with interest period at 10%.
Sample Problem:
1. Find the amount at the end of the two years and seven months if P1000 is
invested at 8% compounded quarterly. Using simple interest for any less than
a year with interest period at 10%.
“DO ONE THING AT A TIME WITH A SUPREME EXCELLENCE”