Mini Feature NOMINAL & EFFECTIVE INTEREST RATES

By: Dr K C Gupta, YBB Personal Finance

CONTRARIAN INDICATORS

AAII Bull-Bear Spread -0.7% (below average)
CNN Fear & Greed Index 42 (fear-low)
NYSE %Above 50-dMA 49.18% (negative)
SP500 %Above 50-dMA 54.60% (positive)

ICI Fund Allocations (Cumulative), 4/30/26
OEFs & ETFs: Stocks 62.61%, Hybrids 3.96%, Bonds 17.12%, M-Mkt 16.31%

INTEREST RATES

CME FedWatch
Cycle peak 5.25-5.50%
Current 3.50-3.75%
FOMC 6/17/26+ hold (WARSH-Fed)
FOMC 7/29/26+ hold

Treasury

T-Bills 3-mo yield 3.78%, 1-yr 3.88%; T-Notes 2-yr 4.17%, 5-yr 4.29%, 10-yr 4.55%; T-Bonds 30-yr 5.01%;
TIPS/Real yields 5-yr 1.81%, 10-yr 2.19%, 30-yr 2.74%
FRNs Index 3.664%

Bank Rates  www.depositaccounts.com/



Stable-Value (SV) Rates, 6/1/26
TIAA Traditional Annuity (Accumulation) Rates
Restricted RC 5.25%, RA 5.00%
Flexible RCP 4.50%, SRA 4.25%, IRA-101110+ 3.65%
TIAA MYGA 4.35% (3-yr), 4.50% (5-yr), 4.60% (7-yr)
TSP G Fund 4.500% (previous 4.500%)

India Fear & Greed MMI 50.33 (greed, barely)
Weekly ETFs: INDA -2.51%, INDY -2.37%, EPI -2.44%, INDH -2.40% | SPY -2.50%

The data above are as of Sunday preceding the publication date.

AIR INDIA 171 ANNIVERSARY

It was a year ago that tragic Air India 171 (Boeing 787-8/Dreamliner) accident happened on 6/12/25. Among 12 crew members & 230 passengers on board, only 1 passenger survived; dozens on ground were also killed or injured. The “preliminary” Indian AAIB report was hastily released on 7/12/25. Flight numbers AI-171/172 were retired & temporarily changed to AI-159/160, but later, Ahmedabad–London Gatwick route was dropped.

There have been various media speculations about the cause(s) – pilot error, defective fuel switches, water leak or fire in the tail area electronics, chip or software malfunction, faulty WOW sensor, overloaded aircraft on a hot day, etc. The recent news was about Indian DGCA sending representatives to observe testing of the fuel switches at Boeing plant in Seattle.

With the recovery of both black boxes, 26 minutes of audio & lot of forensic investigations for 12 months, it’s time that full accident report be issued. AAIB may issue an “interim” report on the anniversary (6/12/26 – today) or the “final” report after a few months.

IT/TECH

Indian IT multinational LTM, a Larsen & Toubro Group company, will acquire some tech & consulting businesses of Netherlands’ HR multinational Randstads in Europe & Australia.

Gorilla Technology/GRRR (UK), Super Micro Computers/SMCI (US) & Yotta Data Services (India) are launching AI infrastructure projects in India. AI datacenter services will be provided for Asia, Europe & Middle East. Yotta Data Services (India) is no longer planning a listing in US through SPAC merger & it’s not related to fintech Yotta Technologies (US).

ECONONY. RBI held repo rate at 5.25%.  RBI gold remains at 880.52 tonnes – ignore rumors of gold sales to defend rupee.

SPECIAL TOPIC – NOMINAL & EFFECTIVE INTEREST RATES

Annual nominal interest rate (i_nom%), also called the annual percent rate (APR), is the quoted rate by BANKS that may be simple, or compounded daily, monthly, semiannually or annually. If the compounding period is monthly, then the monthly nominal rate is (i_nom/12).

Effective annual rate (EAR) i_eff% includes the compounding effect., i.e. interest-on-interest. So, for MONTHLY compounding,
i_eff = 100*[{1 + (i_nom/1200)}^12 – 1 ]

Applying this formula to annual nominal rate of 6.00%,
i_eff
= 100*[{1 + (6/1200)}^12 – 1 ]
= 100*[1.005^12 – 1]
= 100*0.061678
= 6.1678

So, the effective annual rate is 6.1678% & the extra amount over the annual nominal rate of 6.00% is the interest-on-interest compounded MONTHLY. Also note that i_eff > i_nom (or, EAR > APR).

For WEEKLY compounding, i_eff = 6.1800%; for DAILY compounding, i_eff = 6.1831%. So, as the compounding periods increase, the incremental increases become small, and finally, the limit for CONTINUOUS compounding is 6.1837%, not much above daily compounding.

The differences with compound interest grow over multiple years. So, with APR of 6% compounded DAILY over 10 years, the initial $amount will grow by +82.2029% (+105.4312% in 12 years, almost double), while with simple interest only by 10*6 = 60% (+72% only in 12 years). This is referred to as compounding magic.

Be careful that several ANNUITY companies will quote the higher EAR but banks are required to quote the lower APR. So, an annuity quote of 6% effective annual rate may be only 5.8274% annual nominal rate (if compounded DAILY). Why? They have different regulators.

You can use apps or business/scientific calculators for these calculations, or just ask a properly formulated question from AI (“What is the effective annual rate for nominal 6% compounded MONTHLY?” Answer 6.17%).

A more complicated AI question: “What is the monthly payment for 30-year $100,000 loan at 6% nominal rate compounded MONTHLY?” Answer $599.55.

For more information, see https://ybbpersonalfinance.proboards.com/