Difference between Nominal and Real Interest Rate | What does nominal interest rate mean? | What is nominal interest rate formula? | Real interest rate meaning |What is the real interest rate formula?
What does nominal interest rate mean?
The nominal interest rate is the interest rate that is reported on loan documents and investment accounts which are not adjusted for inflation. Nominal rates represent the rate of exchange between current and future dollars, unadjusted for the effects of inflation.
Since nominal rates are not adjusted for inflation, they do not convey the prices of lending and borrowing transactions as accurately as real interest rates, which are adjusted for inflation.
What is nominal interest rate formula?
Mathematically; Nominal interest rate calculator with inflation = Real interest rate +inflation rate
Real interest rate meaning
A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor.
What is the real interest rate formula?
Mathematically; Real interest rate calculator = Nominal interest rate – inflation rate
Difference between Nominal and Real Interest Rate
S.No. | Nominal Interest Rate | Real Interest Rate |
1. | A nominal interest rate is the interest rate that does not take inflation into account. | A real interest rate is the interest rate that does take inflation into account. |
2. | The Nominal Interest rate shows you the actual price you are paid (or have to pay) if you lend (or borrow) money. ie; it does not account for the time value of money. | Real Interest rate shows you by how much the actual purchasing power of the money you have in your bank account increases over time. ie; it accounts for the time value of money. |
3. | If inflation is positive then the nominal interest rate is higher than the real interest rate. | If inflation is negative(deflation) then the real interest rate is higher than the nominal interest rate. |
4. | Mathematically; Nominal interest rate calculator with inflation = Real interest rate +inflation rate | Mathematically; Real interest rate calculator = Nominal interest rate – inflation rate |