The interest rate charged on a small loan is 1.5% per month. What are the corresponding 'nominal' and 'effective' rates per annum?
Introduction
The nominal interest rate refers to the rate of interest before accounting for inflation. The term "nominal" can also be used to describe the advertised or quoted rate of interest on a loan that is not adjusted for fees or interest that have already been compounded.
When the benefits of compounded over time are accounted for, an effective annual rate of interest represents the true return on a bank account or any other investment that pays interest. It also displays the actual percentage rate of interest paid on any other debt, including loans and credit card debt.
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