04-05-2011, 03:44 PM
[/quote]
-A nominal interest rate refers to the rate of interest before adjustment for inflation.
-An effective rate is the interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears.
-The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments.
-KIBOR is Karachi Inter Bank Offer Rate, given by specialized institution on daily, weekly, monthly and on 1, 2 and 3 yearly basis to all the commercial banks of Pakistan so that they charge interest to their customers on that basis. This rate is inflation adjusted rate and then banks by adding 1, 2 or 3% in KIBOR rate charge their customers for their profit.
I think my reply will help you in understanding the difference between these terms.
Comments on my post are appreciated.
[/quote]
@monica i partially agree with you. you have answered the questions asked by kanwal correctly but in wrong direction....
she meant to ask the technical difference between them and not the full form of them
Anyways Kanwal
Nominal rate is rate without inflation effect...like for instance a bank says you that they will give u 20 % return on investment!!! the next step you would check is what is the inflation of the country???? in order to evaluate the investment decision in bank.....
definately if its paksitan's bank ...the real rate will be low as inflation is high in pak and if this is bank in UK the inflation rate is low thus you real return will be high thus here your decision is greatly influenced by the inflation effect......that why we compute real return
the formula for computation of real return is as follows
(1+nomial rate)=(1+inflation rate)(1+real rate)
IRR(Internal rate of return)is the rate when all plotted cash flows of the project or investment become zero....it is also computed by IRR formula
effective interest rate is IRR of loan cashflows
Kibor is correctly mentioned by Monica above and its market rate depending on market variable and not related to investment...means its function of market and not function of investment.
i hope the above answers cater you question well
thanks
-A nominal interest rate refers to the rate of interest before adjustment for inflation.
-An effective rate is the interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears.
-The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments.
-KIBOR is Karachi Inter Bank Offer Rate, given by specialized institution on daily, weekly, monthly and on 1, 2 and 3 yearly basis to all the commercial banks of Pakistan so that they charge interest to their customers on that basis. This rate is inflation adjusted rate and then banks by adding 1, 2 or 3% in KIBOR rate charge their customers for their profit.
I think my reply will help you in understanding the difference between these terms.
Comments on my post are appreciated.
[/quote]
@monica i partially agree with you. you have answered the questions asked by kanwal correctly but in wrong direction....
she meant to ask the technical difference between them and not the full form of them
Anyways Kanwal
Nominal rate is rate without inflation effect...like for instance a bank says you that they will give u 20 % return on investment!!! the next step you would check is what is the inflation of the country???? in order to evaluate the investment decision in bank.....
definately if its paksitan's bank ...the real rate will be low as inflation is high in pak and if this is bank in UK the inflation rate is low thus you real return will be high thus here your decision is greatly influenced by the inflation effect......that why we compute real return
the formula for computation of real return is as follows
(1+nomial rate)=(1+inflation rate)(1+real rate)
IRR(Internal rate of return)is the rate when all plotted cash flows of the project or investment become zero....it is also computed by IRR formula
effective interest rate is IRR of loan cashflows
Kibor is correctly mentioned by Monica above and its market rate depending on market variable and not related to investment...means its function of market and not function of investment.
i hope the above answers cater you question well
thanks
