16634 Lecture Notes - Lecture 5: Nominal Interest Rate, Effective Interest Rate
Document Summary
Lecture 5: topic 3 nominal & effective interest rates. Sometimes, time value of money calculations in property involve periods other than annual periods (for example, daily, monthly, quarterly etc). One very common example is housing loans where interest is quoted at an annual rate but repayments of principal and interest are made monthly. It is important that a valuer uses actual or true rates of interest in calculations and thus must be able to convert nominal rates of interest to effective rates of interest. A nominal interest rate is the periodic interest rate times the number of periods per year and is usually the rate quoted by the lending institution. For example, a nominal annual interest rate of 12% based on monthly compounding means a 1% interest rate per month (compounded). A nominal interest rate without the compounding frequency or rest is not fully defined and thus is meaningless.
