A nominal interest rate is the interest rate "as stated" - that is, not adjusted for compounding. This is the interest rate that would appear on a contract from a bank or car dealer and other companies. An interest rate is called nominal if the period of time after that the interest is credited (e.g. a month) is not identical to the basic time unit (normally a year).
A nominal interest rate of 6% compounded monthly is equivalent to an effective interest rate of 6.16%. (Effective interest rate is always calculated as if compounded annually.) 6% monthly is credited as 6%/12 = 0.5% every month. After one year, the initial capital is increased by the factor (1+0.005)12 ≈ 1.0616. In contrast to a nominal interest rate, the period of time after that the interest is credited coincides with the basic time unit (normally one year). ...
If a nominal interest rate is adjusted for the lender's lost value due to inflation, that is called the real interest rate. The relationship between real and nominal interest rate can be described in the equation "real interest rate + expected inflation = nominal inflation rate The real interest rate is the interest rate charged to a risk free borrower, minus the inflation rate. ...
Feeds |
Contact