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.

Answer 1

Consider that Oxford Dictionary defines the word nominal as a value that is “stated or expressed but not necessarily corresponding exactly to the real value.”

 

The reason for why the term nominal rate is used to describe the annual percentage rate of an investment account that compound interest is explained as follows:

 

When interest is compounded, the percentage of interest earned to principal ends up being greater than the annual percentage rate for the investment account.

 

Thus, the annual percentage rate does not necessarily correspond to the real interest earned, which is the very definition of nominal.

Thus, the annual percentage rate does not necessarily correspond to the real interest earned, which is the very definition of nominal.