In all engineering economy relations developed thus far, the interest rate has been a constant, annual value. For a substantial percentage of the projects evaluated by engineers in practice, the interest rate is compounded more frequently than once a year; frequencies such as semiannual, quarterly, and monthly are common. In fact, weekly, daily, and even continuous compounding may be experienced in some project evaluations. Also, in our own personal lives, many of the financial considerations we make—loans of all types (home mortgages, credit cards, automobiles, boats), checking and savings accounts, investments, stock option plans, etc.—have interest rates compounded for a time period shorter than 1 year. This requires the introduction of two new terms—nominal and effective interest rates. This chapter explains how to understand and use nominal and effective interest rates in engineering practice and in daily life situations.