NOMINAL Function in Excel: Explained

In this article, you will learn how to use the NOMINAL formula in Excel.

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What is the NOMINAL formula in Excel?

The NOMINAL function is used to convert an effective interest rate to a nominal interest rate. The nominal interest rate is the stated interest rate per period, without considering compounding.

Uses of NOMINAL formula in Excel

The NOMINAL function in Excel has several uses and applications. Here are some common scenarios where the NOMINAL function can be helpful:

1. Loan or Mortgage Comparisons: When comparing different loan or mortgage options, lenders may present interest rates with varying compounding periods. The NOMINAL function allows you to convert these rates into their nominal counterparts, enabling accurate comparisons and understanding of the actual interest costs.
2. Investment Analysis: When evaluating investment options that provide effective interest rates, such as bonds or savings accounts, the NOMINAL function helps convert the rates into nominal terms. This allows for easier comparison and assessment of investment returns.
3. Interest Rate Conversion: If you come across interest rates expressed as effective rates but need them in nominal form for specific calculations or reporting purposes, the NOMINAL function simplifies the conversion process.

Overall, the NOMINAL function is valuable in financial analysis, loan comparisons, investment evaluations, and any scenario where you need to convert effective interest rates into nominal rates or vice versa. It facilitates consistent comparisons, accurate calculations, and better decision-making in various financial contexts.

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How to use the NOMINAL formula in Excel

Syntax: 

=NOMINAL(effect_rate, npery)

Where, 

effect_rate is the effective interest rate per period.

npery is the number of compounding periods per year..

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The NOMINAL function calculates the nominal interest rate using the following formula:

=Nominal Interest Rate = (1 + effect_rate)^(npery) - 1 

Example Case - Loan Comparison

Suppose you're comparing two loan options from different lenders. One lender offers an effective interest rate of 7%, compounded quarterly, while the other lender offers an effective interest rate of 6%, compounded monthly. To accurately compare the two loans, you need to convert the rates into their corresponding nominal rates. 

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Step 1: Enter the information available about the two loan options you ae comparing

Step 2: Enter the following formula to calculate the nominal interest rate for both the loan options

=NOMINAL(C2,C3)

=NOMINAL(C5,C6)

Step 3: Press Enter to calculate the yield for the two loan options

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By comparing the nominal interest rates in cells E2 and E5, you can determine which loan option has a lower rate, indicating a more cost-effective choice for your home renovation project.

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This case study showcases how the NOMINAL function in Excel can be used to compare loan options by calculating their nominal interest rates. Comparing nominal rates helps you make informed decisions about loan choices and identify the most advantageous option based on interest costs.

Key things to note when using the NOMINAL function:

1. Consistency with Effective Rate: Ensure that the effective interest rate you provide as the argument for the NOMINAL function aligns with the compounding periods per year (npery). If the effective rate is annual, npery should be set to 1. If the effective rate is a monthly rate, npery should be set to 12. Inconsistencies can lead to incorrect results.
2. Data Type: Ensure that the effective interest rate and npery arguments are numeric values. Using text or non-numeric values may result in errors.
3. Compounding Frequency: Understand the compounding frequency of the interest rate being converted. This information is crucial to determining the appropriate value for the npery argument. Compounding frequencies can be annual, semi-annual, quarterly, monthly, or any other period, and the value of npery should reflect this accurately.
4. Understanding Nominal Rates: Remember that nominal interest rates do not account for the effects of compounding. They represent the annual interest rate without considering compounding periods. Using nominal rates appropriately in calculations and comparisons is important to avoid incorrect assumptions about interest costs or investment returns.
5. Result Formatting: Format the cell or formula output appropriately to display the results as percentages or any other desired format, depending on your requirements.

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