Eh Sai know what is Nominal Interest Rate and Effective Interest Rate , ah? This one sibeh useful lah, can help you see how much real interest you get after compounding & inflation. You just hentam in the numbers, then the calculator do all the math for you, no need headache lah. With this calculator, you can see if the bank’s interest rate really good or just look good only woh. Best part, can help you decide if the bond or loan worth it or not, confirm chop!
Nominal Interest Rate & Effective Interest Rate Calculator
Result Here
What is Real Interest Rate
Real Interest rate is the real interest return an investor or lender gets after factoring inflation into consideration.
Formula:
Nominal Interest Rate = Real Interest Rate + Inflation Rate
Case Study:
James is a bond investor, he looking for a bond with annual return of 5%.
The current inflation rate is 2%.
Real Interest Rate = 5%
Inflation Rate = 2%
Nominal Interest Rate = 5% + 2%
Nominal Interest Rate = 7%
James should look for a bond contract with nominal rate 7%.
What is Nominal Interest Rate
Nominal interest rate refers to the rate of interest before considering inflation. It also can be explained as the interest rate specified in the loan contract without adjusting for compounding.
Formula:
Nominal Interest Rate = [ (1 + Effective Interest Rate)^(1/Compound Time Annually) – 1] x Compound Time Annually
Case Study:
Bank A offers an effective interest rate 5%, interest being compounded monthly.
Nominal Interest Rate = [ (1 + 5%)^(1/12) – 1] x 12
Nominal Interest Rate = 4.88%
What is Effective Interest Rate
Calculated based on the nominal interest rate being compounded n times (monthly, quarterly, yearly).
Formula:
Effective Rate = (1 + Nominal Interest Rate/Compound Time Annually )^Compound Time Annually – 1
Case Study:
Bank A offers a nominal interest rate 5%, interest being compounded monthly.
Effective Rate = (1 + 5%/12 )^12 – 1
Effective Rate = 5.116%
Effective Period Rate = 5% / 12 = 0.05 / 12 = 0.4167%