The nominal interest rate and annual percentage rate are the two types of interest rates used . There are substantial differences between the two modalities , that future will be detailed lines .
Differences between the two interest rates
The two main ways that are used to measure interest rates are nominal interest rate (TIN ) and the annual percentage rate ( APR) .
To calculate the nominal interest rate , which is not simply the amount of money paid if the interest is paid , the first thing to consider is your annual or monthly basis .
If this is an annual rate , upon the expiration of the year or fiscal year , the saver have the amount deposited plus the rate of interest on that amount .
If on the other hand , is a monthly rate , during the first month shall apply to the amount invested , the annual rate divided by twelve . In the following months , the same percentage is applied , but the amount will be the result of adding to the initial amount , the interest of the previous months .
When talking about annual percentage rate or APR refers to the real interest rate is obtained in one operation.
In the annual interest rate , annual percentage rate equals the nominal interest rate .
In contrast, for the monthly rates , the APR becomes the actual type by which you get the exact amount of the return .
A practical example
For example , if a customer has deposited $ 10,000 in a bank, annual nominal rate of 6% after one year , have a total of 10,600 euros.
In this case , the annual percentage rate would also be 6% , and income received from it.
If, however , the nominal interest rate is monthly , the rate becomes: 6% / 12 = 0.5 % each month.
In the first month , the return would be: 10,000 + 10,000 * 0.5 % = 10,050 euros.
The following month , the calculation would be: 10,050 + 10,050 * 0.5 % = 10100.25 euros , and so on.
At the end of the year , the total yield would be 10,617 euros.
Although the amount is greater with the monthly rate to an annual rate , the nominal interest rate would remain at 6%, but the annual percentage rate becomes 6.17% .
SAD is larger than the TIN , as regards the actual performance of the operation.