Nominal interest rate

Definition

A nominal interest rate is the annual rate a bank quotes, together with how often interest is compounded (for example 12% p.a. compounded monthly). Because interest is added more than once a year, the true yearly growth, the effective rate, is higher.

Worked example

12% p.a. compounded monthly means 1% per month, which gives an effective rate of (1.01)¹² − 1 = 12.68% p.a.

R10 000 at 8% p.a. compounded quarterly for 3 years: i = 0.02 per quarter and n = 12, so A = 10 000(1.02)¹² = R12 682.42.

Where it appears in the exam

Nominal interest rate is part of the financial maths section of CAPS Grade 11 Mathematics and is examined in Paper 1 of the November exam.

Step-by-step method

1. Divide the nominal rate by the number of compounding periods m.
2. Multiply the number of years by m.
3. Use A = P(1 + i/m)^(nm) for amounts.
4. Use 1 + i_eff = (1 + i_nom/m)ᵐ to compare with an effective rate.

Common mistake

Using the nominal annual rate with monthly periods without dividing it by 12.

Related financial maths terms

• Compound interest
• Effective interest rate
• Annuity
• Depreciation
• Simple interest
• Hire purchase

Frequently asked questions

What does nominal interest rate mean in Grade 11 Maths?

A nominal interest rate is the annual rate a bank quotes, together with how often interest is compounded (for example 12% p.a. compounded monthly). Because interest is added more than once a year, the true yearly growth, the effective rate, is higher.

Which paper tests nominal interest rate in Grade 11?

Nominal interest rate belongs to the Financial maths section of CAPS Grade 11 Mathematics, which is examined in Paper 1 of the November exam.

How do I practise questions involving nominal interest rate?

Snap a question that uses nominal interest rate into Snap&Learn with your grade set to Grade 11, or work through the Grade 11 topic guide and practice papers.