How to use the NOMINAL function in Excel

In this article, we will learn How to use the NOMINAL function in Excel.

Scenario :

When working with financial statements, sometimes we need to use the nominal interest rate instead of effective interest rate. Nominal interest rate refers to the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest.

There are two forms of Interest rate used in terms of loan.

  1. Nominal Interest rate : The nominal interest rate doesn’t take into account the annual compounding period.
  2. Effective Interest rate : The effective Interest rate does take into account the annual compounding period and thus returns the accurate measures of Interest charges.

The numerical calculation relation between the two is shown below.

Here Npery is number of compounding periods per year 

The above formula can be used either way to calculate effective interest rate given nominal interest rate and npery value.

 

NOMINAL function in Excel

NOMINAL function returns the interest rate for the given effective rate argument and compounding period per year (npery) argument. Let's understand the formula with the arguments used.

NOMINAL function syntax :

=NOMINAL (effect_rate, npery)

effective rate : effective rate given as percentage or in decimals.

npery : number of compounding period per year

 

Example :

All of these might be confusing to understand. Let's understand this function using an example. Here we are given a 10% effective rate with different compounding periods per year value to show the change in nominal rate w.r.t to npery value. 

Use the formula:

=NOMINAL(B3,C3)

As you can see if the npery is equal to 1. Copy the formula to the rest of cells using the shortcut Ctrl + D or dragging down from the formula from the right bottom of the cell.

As you can see the change in nominal rate due to change in compounding periods. Generally, effective interest rate is used as it takes into account the annual compounding period and thus returns the accurate measures of Interest charges.

Here are all the observational notes regarding using the formula.
Notes :

  1. Npery argument is truncated to nearest integers by the formula itself.
  2. If npery equal to 1 then nominal rate = effective rate
  3. The function generates #VALUE! Error if arguments to the function is non - numeric.
  4. The function generates #NUM! Error if: 
  • The value of effective_rate is less than or equal to 0.
  • The value of npery is less than one.

Hope you understood how to use the NOMINAL function in Excel. Find more articles on financial formulas and related functions here. If you liked our blogs, share it with your friends on Facebook. And also you can follow us on Twitter and Facebook. We would love to hear from you, do let us know how we can improve, complement or innovate our work and make it better for you. Write to us at info@exceltip.com.

 

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