What is a Nominal Interest Rate?
An interest rate is a percentage of an amount of money, which a borrower pays a lender for the privilege of borrowing it. Most interest rates are quoted as a nominal interest rate, meaning one that is not adjusted for inflation. A nominal interest rate does not take into account the fact that the value of money changes and decreases over time due to inflation. This is not necessarily a bad thing, since it is impossible to predict future inflation, and because a fixed rate of return for borrowed funds must be agreed upon beforehand. A nominal interest rate is one such as the interest rate on a mortgage, or the interest one might earn on a high-yield savings account. It is the interest rate as stated. This is distinct from what is called a real interest rate, which is one that has been adjusted for inflation. Real interest rates are usually lower than nominal interest rates. For example, if a bank customer puts $1,000 US Dollars (USD) in a certificate of deposit which offers a five perce
The nominal rate is the actual interest rate paid on an investment. For example, consider a U.S. Savings bond with a stated interest rate of 5%. This rate is considered the nominal rate. It is expected (but not guaranteed) to compensate the holder of the savings bond for inflation plus an additional return (i.e. “real” yield).
