Episode 7 — Finance Growth and Decay

Nominal and Effective Interest Rates

Learners will be able to:

• Identify the nominal interest rate as an interest rate compounded more than once a year. • Explain that the m in the formula for the nominal interest rate indicates how many times per year the interest is compounded. • Calculate the effective interest rate using the formula 1 + i = (1 + i/m)^(m). • Compare two different interest rates by converting one to the other using the formula 1 + i = (1 + i/m)^(m).