Nominal

• The term nominal describes an interest rate before it is adjusted for inflation. That is, its rate reflects the amount of the investor's return on his investment, not the value of it.
  
  

Annual

• Annual interest rates are interest rates that are only compounded once a year, or on an annual basis.
  
  

Compounding

• Compounding is when interest is calculated on an amount. Further interest is then compounded on this amount.
  
  

Example

• This means that a loan of $1,000 compounded annually at 5 percent earns $50 at the end of 12 months. The same loan compounded every six months at 2 percent, though, earns $50.63, which is not much to start with but over time it can grow substantially.
  
  

Nominal & Annual

• What this all means is that when considering a bank account's earning potential, you need to consider both how often it compounds and whether its interest rate is nominal or not.