Nominal, effective and maturity rates

When it comes to advertised interest rates the bank is offering, it can be confusing, especially the actual interest rate being offered. This makes it difficult to compare the rates on offer. The nominal interest rate is the actual interest rate the bank pays a client each month. This is the best rate to use when making comparisons. The nominal interest rate is used to calculate the daily interest earned on your account balance, which accumulates until it is capitalised
on an agreed date every month.
The interest is then either reinvested or transferred to your savings account. The annual effective rate is the interest rate compounded monthly over 12 months if you did not draw the interest out of the account each month. Interest on maturity is the interest rate compounded monthly over the entire period of your investment. The longer the investment is held, the greater the compounding effect and therefore the higher the interest on maturity.
For example, Bank A pays a nominal interest rate of 9.65% on a 60-month fixed deposit. If you left the interest to be reinvested, it would have a compounding effect, which results in an interest on maturity of 12.48% per annum. It is the same 9.65% interest paid but left to compound. This is why advertised rates can be confusing. If Bank A used the maturity rate of 12.48% in
its advertising, it may look better than the nominal interest rate of 9.94% paid by Bank B. But actually, Bank B’s interest rate is higher. Always make sure you compare the same rates.