Difference between nominal rate and effective rate of interest

Difference between nominal rate of interest and effective rate of interest is given below:

Nominal rate of interest:

  1. Nominal rate is an annual rate.
  2. The nominal rate of interest is calculated by annually.
  3. Does not depend on the effective rate of interest.
  4. Cannot be greater than the effective rate of interest.

Effective rate of interest

  1. The effective rate of interest is the rate that actually earned.
  2. The effective rate of interest is calculated by making the effective time period equal to the compounding period.
  3. Depends on nominal rate of interest.
  4. Maybe equal or greater than nominal rate of interest.

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