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Nominal vs. Effective Rates

Interpreting interest rates is not always as straightforward as it seems, and getting it right can have important implications for all parties involved in a commercial real estate transaction.  Interest rates can take two forms: nominal interest rates and effective interest rates.  As a result, there can be some confusion about what a quoted interest rate actually means.
In this article, we will take a deep dive into the differences between nominal and effective rates. We’ll start with the basic intuition behind effective and nominal rates, then walk through the math step by step, with several examples along the way.

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