Difference between nominal rate of interest and effective rate of interest is given below:
Nominal rate of interest:
- Nominal rate is an annual rate.
- The nominal rate of interest is calculated by annually.
- Does not depend on the effective rate of interest.
- Cannot be greater than the effective rate of interest.
Effective rate of interest
- The effective rate of interest is the rate that actually earned.
- The effective rate of interest is calculated by making the effective time period equal to the compounding period.
- Depends on nominal rate of interest.
- Maybe equal or greater than nominal rate of interest.
