NOMINAL_ADD function
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NOMINAL_ADD
Returns a nominal interest rate given the effective compounded interest rate.
Syntax:
NOMINAL_ADD(eff_rate; num)
- eff_rate: the effective interest rate.
- num: the number of times interest is credited / compounded during the period that the nominal rate applies to.
- If an investment has a nominal rate, say for a year, but interest is paid and credited say each quarter, the interest paid each quarter will itself start earning interest. This increases the effective value. The effective rate is the rate that would have to be paid at the end of the (say) year to give the same return.
- Given an effective rate, this function returns the appropriate nominal rate.
- The formula used is:
- nom_rate = num[(1 + eff_rate)^{1/num} - 1]
Example:
NOMINAL_ADD(0.06; 4)
- returns approximately 0.0587, which is the nominal rate for an investment with an effective rate of 6% per annum, compounded quarterly.
Issues:
- The calculation assumes that interest is credited at the end of exactly equal periods. In reality, different quarter-years, for example, have different numbers of days.
See Also