Question
The Oxford Dictionary defines the word nominal as a value that is "stated or expressed but not necessarily corresponding exactly to the real value." Develop a reasonable argument for why the term nominal rate is used to describe the annual percentage rate of an investment account that compounds interest.
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According to the Oxford Dictionary, nominal is defined as a value that is "stated or expressed but not necessarily corresponding exactly to the real value". Show more…
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The Oxford Dictionary defines the word nominal as a value that is “stated or expressed but not necessarily corresponding exactly to the real value."$^{[18]}$ Develop a reasonable argument for why the term nominal rate is used to describe the annual percentage rate of an investment account that compounds interest.
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The interest rate stated by a financial institution is sometimes called the nominal rate. If interest is compounded, the actual rate is, in general, higher than the nominal rate, and is called the effective rate. If $r$ is the nominal rate and $n$ is the number of times interest is compounded annually, then $$R=\left(1+\frac{r}{n}\right)^{n}-1$$ is the effective rate. Here, $R$ represents the annual rate that the investment would earn if simple interest were paid. Estimate the effective rate if the nominal rate is $4.5 \%$ and interest is compounded daily $(n=365)$
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The interest rate stated by a financial institution is sometimes called the nominal rate. If interest is compounded, the actual rate is, in general, higher than the nominal rate, and is called the effective rate. If $r$ is the nominal rate and $n$ is the number of times interest is compounded annually, then $$R=\left(1+\frac{r}{n}\right)^{n}-1$$ is the effective rate. Here, $R$ represents the annual rate that the investment would earn if simple interest were paid. Find the effective rate to the nearest hundredth of a percent if the nominal rate is $3 \%$ and interest is compounded quarterly.
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