<P> Confusingly, in the context of inflation,' nominal' has a different meaning . A nominal rate can mean a rate before adjusting for inflation, and a real rate is a constant - prices rate . The Fisher equation is used to convert between real and nominal rates . To avoid confusion about the term nominal which has these different meanings, some finance textbooks use the term' Annualised Percentage Rate' or APR rather than' nominal rate' when they are discussing the difference between effective rates and APR's . </P> <P> The term should not be confused with simple interest (as opposed to compound interest) which is not compounded . </P> <P> The effective interest rate is always calculated as if compounded annually . The effective rate is calculated in the following way, where r is the effective rate, i the nominal rate (as a decimal, e.g. 12% = 0.12), and n the number of compounding periods per year (for example, 12 for monthly compounding): </P> <Dl> <Dd> r = (1 + i / n) n − 1 (\ displaystyle r \ =\ (1 + i / n) ^ (n) - 1) </Dd> </Dl>

The nominal rate of interest is equal to