Definition of Nominal Interest Rate
In financial circumstances and economic atmosphere the interest rate which is not adjusted for inflammation according to the real interest rate is referred to as Nominal interest rate. There is another definition of Nominal interest rate which is defined as predetermined interest rate without adjustment for the full effect of compounding. The interest rate is interpreted as nominal when the rate of occurrence of frequency (such as month) does not match with the basic time unit (like annually.
The equation that relates Nominal interest rate with Real interest rate is,
(1 + nominal rate) = (1 + real interest rate) (1 + inflation rate).
It can be approximated as nominal rate = real interest rate + inflation rate.
Books on Nominal Interest Rate
Book 1:
Macroeconomics for Today By Irvin Tucker (published by Cengage Learning, 2010)
Book 2:
Microeconomics By Roger A. Arnold (published by Cengage Learning, 2010)
How Nominal Interest Rate works?
With the two of examples, the theory of Nominal interest rate can be understandable, that how this finance concept has impact on the atmosphere of finance as well economics,
- Suppose, a person has invested on three-year deposit with the nominal interest rate of 4%, and inflation rate would 3% after the maturation, so as believed that the investor’s real interest rate return is 1% on his investments, when the real interest rate is low, it will ensure that the investor would be able to purchase.
- Here is a daily compounding example on Nominal interest rate; a loan with daily compounding possess higher rate compared to others in effective annual task. Suppose there is a loan of 10% nominal interest rate with daily compounding, the effective annual rate will be counted as 10.516%.
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