NOMINAL function

The NOMINAL function in Excel calculates the nominal annual interest rate (also known as the “stated interest rate”) given the effective annual interest rate and the number of periods in a year.

Syntax

NOMINAL(effect_rate, npery)

Parameters

• effect_rate: The effective annual interest rate (as a decimal). This is the rate that reflects the impact of compounding within the year.
• npery: The number of compounding periods per year. For example, if interest is compounded monthly, this would be 12; if quarterly, it would be 4.

How It Works

• The NOMINAL function is used to find the nominal interest rate based on the effective interest rate and the number of periods in a year. The nominal interest rate is the rate that does not take into account compounding within the year. It is a simpler rate used when the compounding frequency is taken into consideration.
• The relationship between the nominal and effective interest rates is given by the following formula:

$$\text{Nominal Rate} = \left( (1 + \text{Effective Rate})^{1/n} – 1 \right) \times n$$

Where:

• n is the number of compounding periods per year.
• Effective Rate is the annual effective interest rate.

Example

Let’s say you know the effective annual interest rate is 8% (0.08) and interest is compounded monthly (12 periods per year). To find the nominal rate:

=NOMINAL(0.08, 12)

• 0.08 is the effective annual interest rate (8%).
• 12 is the number of periods per year (monthly compounding).

The function will return a nominal interest rate of approximately 0.07722 or 7.722%.

Explanation of Example

• Effective Rate: 8% (0.08)
• Number of periods: 12 (compounded monthly)

Using the NOMINAL function, Excel calculates that the nominal interest rate is about 7.722%, which represents the annual rate without compounding.

Important Notes

• The NOMINAL function is useful when you need to convert an effective annual rate into a nominal rate based on a different compounding period.
• The result is always expressed as a decimal. To view the result as a percentage, you can format the cell as a percentage or multiply the result by 100.

Summary

The NOMINAL function in Excel allows you to convert an effective annual interest rate to a nominal interest rate based on the number of compounding periods per year. This is useful when comparing different interest rate compounding scenarios.