Nominal interest rate definition
/What is the Nominal Interest Rate?
The nominal interest rate is the interest percentage stated in a contractual lending arrangement. This interest rate is not adjusted for the effects of inflation , so the return to the lender could be negative, if the inflation rate is higher than the nominal interest rate. Consequently, a lender must build inflationary expectations into the interest rate associated with a loan , or include a clause that adjusts the nominal interest rate for the effects of inflation.
Example of the Nominal Interest Rate
For example, if the inflation rate is 10% and the nominal interest rate is 8%, the lender will experience a negative return of 2%.
