What is the term used for the interest rate that you would earn on an investment, as opposed to the nominal interest rate?

The term used for the interest rate that you would earn on an investment, as opposed to the nominal interest rate, is the effective interest rate. This rate reflects the true annual interest earned on an investment by taking compounding into account, which is not considered in the nominal interest rate.

When calculating the effective interest rate, one considers how often interest is applied (compounded) over a year. For example, if interest is compounded monthly, the effective interest rate would be higher than the nominal rate due to the effect of earning interest on previously accumulated interest. This makes the effective interest rate a more accurate representation of actual investment growth, especially for investments like savings accounts or bonds where compounding occurs frequently.

Understanding the effective interest rate is crucial for comparing different investment products, as it allows investors to see the real returns they can expect. This is essential for making informed decisions regarding where to invest their money for optimal growth.