No-arbitrage and Nominal annual rate: Difference between pages
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The rate of return - or cost of borrowing - ''per [[conventional year]]'' 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 sometimes used interchangeably with nominal annual rate. | |||
===<span style="color:#4B0082">Example 1: Overnight interest</span>=== | |||
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%. | |||
===Other names for Nominal annual rates=== | |||
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=== | |||
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 (r) to a nominal annual rate (R)==== | |||
R = r x n | |||
====To convert from a nominal annual rate (R) to a periodic rate (r)==== | |||
r = R / n | |||
====<span style="color:#4B0082">Example 2: Calculating periodic rate</span>==== | |||
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% | |||
====<span style="color:#4B0082">Example 3: Calculating the nominal annual rate</span>==== | |||
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 == | == See also == | ||
* [[ | * [[ACT/365 fixed]] | ||
* [[Continuously compounded rate of return]] | |||
* [[Coupon rate]] | |||
* [[Daily rate]] | |||
* [[Day count conventions]] | |||
* [[Effective annual rate]] | |||
* [[Forward yield]] | |||
* [[Money market]] | |||
* [[Nominal]] | |||
* [[Periodic discount rate]] | |||
* [[Periodic rate of interest]] | |||
* [[Periodic yield]] | |||
* [[Quarterly rate]] | |||
* [[Rate of return]] | |||
* [[Semi-annual rate]] | |||
* [[Nominal annual yield]] | |||
[[Category:Manage_risks]] | |||
Revision as of 16:29, 28 November 2015
The rate of return - or cost of borrowing - per conventional year 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 sometimes used interchangeably with nominal annual rate.
Example 1: Overnight interest
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%.
Other names for Nominal annual rates
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
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 (r) to a nominal annual rate (R)
R = r x n
To convert from a nominal annual rate (R) to a periodic rate (r)
r = R / n
Example 2: Calculating periodic rate
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: Calculating the nominal annual rate
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%
