4.2 Nominal and Periodic Rates

When compound-interest rates are given as above, the percent annual rate is called the nominal rate and denoted by j. To show clearly what the compounding interval is, add a subscript  to the j (j_m) . This indicates the number of times per year the interest is to be compounded.

• Thus, 8% compounded semi-annually would be j₂ = 8%, m=2.
• Thus, 18% compounded monthly would be j₁₂ = 18%, m=12.

The periodic rate is used in most BAII Plus calculations.

The rate that gives the percent interest each period is called the periodic rate and is denoted by i. This is the rate actually used in most formulas. The following are examples.

Example 4.2.1

1. For 8% compounded semi-annually (j₂ = 8% =0.08), [latex]i = \frac{0.08}{2} =0.04 =4%\text{ per half year}[/latex]
2. For 18% compounded monthly (j₁₂ = 18% =0.18), [latex]i = \frac{0.18}{12} =0.015=1.5%\text{ per month}[/latex]

In general, to get i from j_m:

[latex]i = \frac{j_m}{m}[/latex]

Your Own Notes

• Are there any notes you want to take from this section? Is there anything you’d like to copy and paste below?
• These notes are for you only (they will not be stored anywhere)
• Make sure to download them at the end to use as a reference