Why is nominal interest defined the way it is?

Question

So if nominal interest is 12% compounded monthly, it is actually 1% compounded each month. It is not 12% effective year, though it is close (It is 12.7%) So why don't we/they say 1% compounded monthly? Or just use effective yearly rate? Nothing is actually 12%, so why is this number used? I asked my professor this, and her answer was so that we could compare these nominal interest rates, but that doesn't really "sit" with me, because you cannot directly compare these rates. Example: How do you compare 12% compounded monthly, or 13% compounded three times a year. It is not immediately obvious which is greater. So why is nominal interest defined the way it is?

Answer 1

Most banks will tell you the Monthly compound rate(times 12 ) and the effective yield. Most people don't understand compounding. Asking them if they want one percent per month or 12% per year most would think you are comparing apples to oranges. 12% compounded monthly vs 12% compounded annually is more like comparing oranges to tangerines.

Note that this doesn't just go with deposits it goes for loans, mortgages etc. The quoted rate on a car loan may be 12% but you are effectively paying 12.7% . So, saying that you pay 1% per month means you are paying 12.7% per year. Not 12%. The loan looks cheaper than it really is.