Nominal annual rate

The rate of return - or cost of borrowing - per annum named or quoted in a market, under the quoting convention for the given market.

Market quotations are usually given per annum, and for this reason the term nominal rate is often used interchangeably with nominal annual rate.

Example 1

GBP overnight interest payable at the periodic rate of 0.014% per day, would conventionally be quoted on a nominal annual basis as:

= number of times the period fits into a conventional year x periodic rate

= 365 x 0.014%

= 5.11%.

The nominal annual rate is sometimes also known as a 'quoted rate', 'market rate, or 'nominal rate'.

The nominal annual rate should not be confused with the effective annual rate, which is usually different.

Notation

Nominal annual interest rates and yields are often denoted by 'R'.

This distinguishes them from periodic interest rates and yields (r), and from effective annual rates (EAR).

Conversion formulae

Using the notation above:

R = nominal annual interest rate or yield

r = periodic interest rate or yield

n = number of times the period fits into a conventional year

To convert from a periodic rate to a nominal annual rate

R = r x n

To convert from a nominal annual rate to a periodic rate

r = R / n

Example 2

GBP interest is quoted at a nominal annual rate of 5.11% for daily interest calculation.

Calculate the periodic rate per day.

r = R / n

= 5.11% / 365

= 0.014%

Example 3

The periodic rate for GBP interest is 0.01% per day.

Calculate the nominal annual rate.

R = r x 365

= 0.01% x 365

= 3.65%

See also

• Continuously compounded rate of return
• Daily rate
• Effective annual rate
• Money market
• Nominal
• Periodic discount rate
• Periodic rate of interest
• Periodic yield
• Quarterly rate
• Semi-annual rate