Nominal Rate Of Return

What is a 'Nominal Rate Of Return'

A nominal rate of return is the amount of money generated by an investment before expenses such as taxes, investment fees and inflation are factored in. For example, detailed data on a mutual might show a fund's nominal rate of return as 10%, but also show its return after taxes on distributions and sale of fund shares is only 7%. Investors should look beyond an investment's nominal rate of return to get a true idea of what their investment will earn.

BREAKING DOWN 'Nominal Rate Of Return'

Municipal bonds, for example, generally have a lower nominal rate of return than corporate bonds, but the nominal return and the after-tax return of Munis is usually identical since Munis are usually tax exempt, whereas income earned from corporate bonds will be subject to taxation. Corporate bonds are also subject to tax on capital gains when they are sold, giving them an actual rate of return that may be significantly lower than their nominal rate of return.



RELATED TERMS
  1. After-Tax Real Rate Of Return

    The actual financial benefit of an investment after accounting ...
  2. Nominal Interest Rate

    The interest rate before taking inflation into account. The equation ...
  3. Real Rate Of Return

    The annual percentage return realized on an investment, which ...
  4. Nominal Yield

    The coupon rate on a bond. The nominal yield is the interest ...
  5. Nominal Value

    The stated value of an issued security. Nominal value in economics ...
  6. Nominal

    An unadjusted rate, value or change in value. This type of measure ...
Related Articles
  1. Investing Basics

    What Does Nominal Mean?

    Nominal refers to an unadjusted value or change in value.
  2. Economics

    Understanding Interest Rates: Nominal, Real And Effective

    Interest rates can be broken down into several subcategories that incorporate various factors such as inflation. Smart investors know to look beyond the nominal or coupon rate of a bond or loan ...
  3. Investing Basics

    What is a Nominal Value?

    The nominal value of a security, such as a stock or bond, remains fixed for the duration of its life.
  4. Term

    What's a Real Rate of Return?

    A real rate of return is an annual percentage investment return that’s adjusted for inflation, taxes or other factors.
  5. Economics

    Interest Rates: Nominal and Real

    An interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. Interest rates are the primary yardstick for measuring how much return lenders will get. However, ...
  6. Bonds & Fixed Income

    Introduction To Treasury Inflation-Protected Securities (TIPS)

    If you want to protect your portfolio from inflation, all you need are a few TIPS.
  7. Mutual Funds & ETFs

    How Tax-Efficient Is Your Mutual Fund?

    Learn about factors that influence the tax-efficiency of your mutual fund, how income from your investment is taxed and what to look for when choosing a fund.
  8. Mutual Funds & ETFs

    The Basics of Income Tax on Mutual Funds

    Learn about the basics of income tax on mutual funds, including what types of income may be subject to the capital gains tax rate.
  9. Economics

    The International Fisher Effect: An Introduction

    The Fisher models have the ability to illustrate the expected relationship between interest rates, inflation and exchange rates.
  10. Economics

    Understanding the Fisher Effect

    The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
RELATED FAQS
  1. How do nominal interest rates in finance differ from the nominal rate of interest ...

    Read about the subtle difference between a financial instrument's nominal interest rate of return and the general nominal ... Read Answer >>
  2. Under what circumstances is the nominal value out of line with the real value of ...

    Learn more about nominal stock values and market values. Explore causes of differences between nominal and real values for ... Read Answer >>
  3. How were nominal interest rates in the economy set before the Federal Reserve?

    Learn more about how nominal interest rates are determined, how the Federal Reserve targets them, and how they acted prior ... Read Answer >>
  4. What is the difference between real and nominal interest rates?

    Learn what nominal interest rates and real interest rates are, how real interest rate takes into account the inflation rate, ... Read Answer >>
  5. Is the nominal value of a security ever also the real value?

    Learn more about nominal values and real values. Find out how these market values change and if they may ever converge for ... Read Answer >>
  6. If markets give information on value through price, how can nominal values be out ...

    Learn more about nominal values, real values and how these two measurements differ. Explore the impact of inflation and deflation ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center