DEFINITION of 'Nominal Interest Rate'
The interest rate before taking inflation into account. The nominal interest rate is the rate quoted in loan and deposit agreements. The equation that links nominal and real interest rates is:
(1 + nominal rate) = (1 + real interest rate) (1 + inflation rate).
It can be approximated as nominal rate = real interest rate + inflation rate.
BREAKING DOWN 'Nominal Interest Rate'
To avoid purchasing power erosion through inflation, investors consider the real interest rate, rather than the nominal rate. One way to estimate the real rate of return in the U.S. is to observe the interest rates on Treasury InflationProtected Securities (TIPS). The difference between the yield on a Treasury bond and the yield on TIPS of the same maturity provides an estimate of inflation expectations in the economy.
For example, if the nominal interest rate offered on a threeyear deposit is 4% and the inflation rate over this period is 3%, the investorโs real rate of return would be 1%. While the real rate is low, at least it will preserve the investorโs purchasing power. On the other hand, if the nominal interest rate is, say, 2% in an environment of 3% inflation, the investorโs purchasing power would erode by 1% per annum.
Central banks set shortterm nominal interest rates, which then form the basis for other interest rates charged by banks and financial institutions. Nominal interest rates may be held at artificially low levels after a major recession to stimulate economic activity through low real interest rates. A necessary condition for such stimulus measures is that inflation should not be a present or nearterm threat. Conversely, during inflationary times, central banks may overestimate the inflation level and keep nominal interest rates too high. The resulting elevated level of real interest rates may have serious economic repercussions.

Inflation
The rate at which the general level of prices for goods and services ... 
Nominal Rate Of Return
The amount of money generated by an investment before expenses ... 
Fisher Effect
An economic theory proposed by economist Irving Fisher that describes ... 
Nominal Yield
The coupon rate on a bond. The nominal yield is the interest ... 
Interest Rate Parity
A theory in which the interest rate differential between two ... 
Nominal Value
The stated value of an issued security. Nominal value in economics ...

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, ... 
Investing Basics
How Banks Set Interest Rates On Your Loans
On the face of it, figuring out how a bank makes money is a pretty straightforward affair. A bank earns a spread on the money it lends out from the money it takes in as a deposit. The net interest ... 
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. 
Economics
Forces Behind Interest Rates
Get a deeper understanding of the importance of interest rates and what makes them change. 
Bonds & Fixed Income
Understanding Interest Rates, Inflation And The Bond Market
Get to know the relationships that determine a bond's price and its payout. 
Active Trading
Shield Your Portfolio From Inflation For Real Returns
Inflationprotected securities are part of the equation, but they're not a perfect solution. 
Forex Education
Why Interest Rates Matter For Forex Traders
Central banks' rate changes are one of the biggest influences on the forex market. 
Economics
The Importance Of Inflation And GDP
Learn the underlying theories behind these concepts and what they can mean for your portfolio. 
Investing Basics
How To Prepare For Rising Interest Rates
Get to know the basic, timetested strategies that any investor or trader can use to profit in a rising interest rate environment. 
Mutual Funds & ETFs
The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)
Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.

How does the Fisher effect illustrate returns on bonds?
The Fisher effect illustrates the relationship between inflation, real interest rates and nominal interest rates by showing ... Read Full Answer >> 
What is the difference between real and nominal interest rates?
A nominal interest rate is the interest rate that does not take inflation into account. It is the interest rate that is quoted ... Read Full Answer >> 
What is the relationship between inflation and interest rates?
Inflation and interest rates are linked, and frequently referenced in macroeconomics. Inflation refers to the rate at which ... Read Full Answer >> 
What is comparative advantage?
Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >> 
How does the Wall Street Journal prime rate forecast work?
The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >> 
What's the difference between microeconomics and macroeconomics?
Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>