Nominal interest rate

Definition

Nominal interest rate is the percentage increase in money that the borrower pays to the lender, not accounting for inflation. It represents the rate quoted on loans and investments.

5 Must Know Facts For Your Next Test

1. The nominal interest rate does not reflect the real purchasing power of money.
2. It is often quoted annually but can be adjusted for different compounding periods.
3. Nominal rates are used in various financial products like bonds, mortgages, and savings accounts.
4. The Fisher equation relates nominal interest rates to real interest rates and inflation.
5. Central banks influence nominal interest rates through monetary policy.

Review Questions

• What does the nominal interest rate represent?
• How does the Fisher equation relate to nominal interest rates?
• Why is it important to differentiate between nominal and real interest rates?

Related terms

Real Interest Rate: The nominal interest rate adjusted for inflation, reflecting true purchasing power.

Fisher Equation: An equation that expresses the relationship between nominal interest rate, real interest rate, and inflation.

Monetary Policy: Actions by central banks to control money supply and achieve economic goals such as controlling inflation.