Stated interest rate without accounting for compounding frequency or inflation.
The nominal rate is the annualized interest rate as contractually stipulated, without accounting for compounding frequency. A 6% nominal rate compounded monthly does not equate to 6% effective per year: the monthly rate is 6%/12 = 0.5% and the effective annual rate is (1 + 0.005)^12 − 1 ≈ 6.17%. The distinction between nominal and effective rates is fundamental in finance and actuarial science. In insurance, the nominal rate is used to set credited rates on reserves (euro funds in life insurance, annuities), while the effective rate measures true annualized return. Continuous compounding is the limit as compounding frequency tends to infinity.
Savings account: 3% nominal rate compounded monthly. Effective annual rate = (1 + 0.03/12)^12 − 1 ≈ 3.04%. Seemingly minor difference but significant over 20 years.
nominal rate, stated rate, taux affiché, taux annoncé, coupon rate