What is Nominal interest rate ?
Definition of Nominal interest rate
Brief Explanation of Nominal interest rate
For example, if a borrower borrows $ 100 at an interest rate of 5 % then he is expected to pay $ 5 without taking inflation into account.
Inflation and other costs are a confirm thing that is going to happen. To avoid inflation loss investors, prefer real interest rates. Hence real or effective interest rate exist in contrast to it.
For example if a borrower borrows $ 100 from bank at the interest rate of 5 % an inflation rate is 2 % then the borrower is paying interest at 3 % and bank is receiving only 3 %. Hence bank’s purchasing power is increasing only by 3 %.
Inflation rate can never be estimated accurately by 100%.
Real interest rate = Nominal interest rate – inflation
Real interest rates can both be positive and negative.