The nominal interest rate is the stated or advertised rate of interest on a loan or investment before adjusting for inflation or compounding. It reflects the percentage increase in money owed or earned over a set period but does not account for changes in purchasing power.
Economically, the nominal rate represents the sum of the real interest rate and the inflation rate—the total return (or cost) expressed in current dollars rather than inflation-adjusted terms.
Nominal Interest Rate = Real Rate + Inflation Rate
Example:
If the real rate is 3% and inflation is running at 2%, the nominal rate would be approximately 5%.
