Nominal interest rate (TIN)

economic-dictionary

The nominal interest rate is the profitability obtained in a financial operation that is capitalized in a simple way, that is, taking into account only the principal capital.

The nominal interest rate (TIN) is the opportunity cost of not having the money. Either for the client for his bank deposit (profitability); or to the bank for a loan (interest). This opportunity cost is stipulated based on a percentage that, depending on the term and capital, will report a profit on the initial amount with simple capitalization. It does not include financial expenses or commissions.

In the case of the TIN, it can be said that it would inform us in gross terms, the main difference with the APR. Both indicators are stipulated by each entity independently, and their value is usually linked proportionally to the economic cycle and to benchmark indicators (such as Euribor or Libor).

Of course, when working with the TIN, we must take another fundamental consideration into account, the period of time. The nominal interest rate can be daily, weekly, quarterly, semi-annually, or annually. It does not have a standard reference period, and by not including expenses, it makes it impossible for us to adequately compare products of the same nature. Because of this, the APR was created to simplify this problem by taking the year as a base and to allow us to compare products of the same nature. See difference between TIN and APR.

The TIN is always usually given on an annualized basis. Imagine that we have a thousand euros that we want to save and we go to our branch. The commercial tells us that there is a new offer: a 6-month deposit with a TIN of 5% (annually). This means that our interest will actually be 2.5% (12 months / 2 installments), 25 euros. It is because the TIN was not semiannual, but annual and the product lasts only six months. In short, it is proportional to the time base that we take as a reference.

However, it is very important to note that the TIN is a fixed percentage. If it were not fixed, in the previous example, when changing it to semi-annual, the percentage received would be 2.469508%. Since we would take into account compound interest.

Simple interest

Calculation of the nominal interest rate (TIN)

Mathematically, it can be indicated as follows:

VF = VP (1 + n * i)

Where:

VF: is the future value obtained adding all the interests received

VP: is the present or initial value of the operation

n: number of years considered in the investment

i: interest rate applied in the operation

To directly know the interest obtained during the operation, the formula is:

I = VP (n * i) Where I is the total nominal interest obtained during the entire operation.

Applied to a real situation in a deposit, let's imagine that a bank gives us a return of 5% annual nominal interest for 6 years in exchange for lending them a capital of € 500,000.

In this way, applying the previous formulas, we would obtain € 650,000:

VF = 500,000 (1 + 6 * 0.05) = € 650,000

The interest obtained would be equal to:

I = 500,000 (6 * 0.05) = € 150,000

In this way, the nominal interest is that which is not demanded or paid to us in general for a loan or investment respectively. From the nominal interest we must subtract taxes, commissions and the inflation rate and other types of costs so that it gives us an equivalent real interest rate with which we can homogenize and compare the operations, since depending on the requirements, costs and commissions one operation may be more attractive than another even with a lower nominal interest rate. Unlike the APR, it is not capitalized, so instead of the annual TIN, the total TIN is offered.

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