Nominal Rate of Interest/Examples/Arbitrary Example 1

Example of Nominal Rate of Interest

Let $\pounds 1000$ be invested for $2$ years at $8 \%$ per annum.

Let interest be compounded half-yearly.

The interest rate $8 \%$ per annum is a nominal rate of interest.

Explanation

This the interest it would be if you applied it each conversion period onto the uncompounded principal.

Hence $2 \times 0 \cdotp 04 = 0 \cdotp 08$ and all is well.

Sources

• 1998: David Nelson: The Penguin Dictionary of Mathematics (2nd ed.) ... (previous) ... (next): interest
• 2008: David Nelson: The Penguin Dictionary of Mathematics (4th ed.) ... (previous) ... (next): interest