﻿ Definition of nominal rate - What it is, Meaning and Concept - I want to know everything - 2020

# Nominal Rate

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A rate it is a coefficient that reflects the relationship between two magnitudes and allows to express different concepts, such as the interest (the utility, value or gain of something). The interest rate In this sense, it is an index that is expressed as a percentage and is used to estimate the cost of a loan or the profitability of savings. It is known as nominal interest rate or nominal rate to the interest that capitalizes more than once a year . It is a reference value used in financial operations that is usually set by the authorities to regulate loans and deposits.

The nominal rate is equal to the interest rate per period multiplied by the number of periods . The effective rate, on the other hand, is the real interest that a person pays in a credit or charge in a deposit.

Although it is framed in a certain period of time, the nominal rate includes several Payments of interest in said term. With the effective rate, the yield is calculated in a single payment per period.

For example: the nominal rate is usually expressed in base annual. The contracts, however, can specify that the interest will be calculated several times during the year (either monthly, quarterly or semiannually, among others). The year, therefore, can be divided into twelve months, four quarters or two semesters. If the interest rate is 2% per quarter, it is possible to speak of an annual nominal rate of 8% (since the year has four quarters). A concept closely linked to the nominal rate is that of cost effectiveness; it's about the margin of gain You can return an investment. If the time elapsed to obtain these benefits is taken into account, then the term "time gain" is used. Let's look at an example: if a house is purchased for \$ 500,000 and after one year it is sold for \$ 510,000, the profit that will have been obtained in 12 months is \$ 10,000. Put in other words, if instead of buying the property the \$ 500,000 is invested knowing that for every \$ 100 \$ 2 will be received, at the end of the same period the \$ 10,000 could be obtained.

East money It is used by the person who receives it to produce more, so that he can pay the profit to the investor (\$ 2 per \$ 100) and, the longer he is given, the more profits he will be able to generate. Returning to the nominal interest rate, it can be said that it is the profitability that is obtained from a financial product month by month or in a particular period of time, simply taking into account the capital of the initial investment and is considered a type of simple capitalization.

Given the previous example, it is easy to understand its main difference with the effective interest rate: both the capital initial as the interests that are produced in each period. It is a type of compound capitalization, since the interest generated periodically is added to the capital and based on this amount the interest for the following period is settled.

Both types of interest rate coincide if it is established that the interest generated is paid only at the end of the life of the financial product; On the other hand, if more than one payment is made, the nominal amount is inevitably lower than the effective one.

If you hire a term deposit certificate (CDT) at 6 months for the value of \$ 5000 with an annual nominal rate of 5%, when the period ends we will obtain only 2.5% of the capital. On the other hand, the same deposit with an effective annual rate (also of 5%) will return 2.47%, given that in the latter case the interest charged monthly.

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