Discussion wk 4 Assignment Example | Topics and Well Written Essays - 250 words

Discussion wk 4 - Assignment Example Similarly, firms that are looking to minimize their risk even at a higher cost would go for conservative financing strategies. Nominal interest rate is also termed as the stated interest rate. This interest rate does not include the compounding of the period or the time of the loan or investment and this interest rate is the simple interest rate. On the other hand, effective interest rate considers the compounding of the period throughout the period of the loan or investment. Effective interest rate is used in order to analyze and compare the annual interest between loans or investment with different time periods. Generally, the nominal interest rate is less than the effective interest rate (Elias). Therefore the main factor that causes these two types of interest rate to differ is the period of the loan or investment. Elias, G. What is the difference between effective interest rates and nominal interest rates?. Engineering Economy, 26 Jan. 2014.