1. What is the Nominal Interest Rate?

The nominal interest rate is the stated interest rate of a financial instrument before accounting for inflation. It represents the raw percentage increase in money you expect to earn from an investment or pay on a loan.

2. How Does the Calculator Work?

The calculator uses the Fisher equation approximation:

Where:

• Nominal Rate — The stated interest rate (not adjusted for inflation)
• Real Rate — The interest rate adjusted for inflation (purchasing power)
• Inflation Rate — The rate at which prices increase over time

Explanation: This simple approximation shows how inflation affects the real value of interest rates. The exact Fisher equation is (1 + nominal) = (1 + real) × (1 + inflation).

3. Importance of Nominal Rate Calculation

Details: Understanding the relationship between nominal and real rates helps investors evaluate true returns and helps borrowers understand real costs of loans.

4. Using the Calculator

Tips: Enter both rates in decimal form (e.g., 0.05 for 5%). The calculator will output the nominal rate as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between nominal and real rates?
A: Nominal rates don't account for inflation while real rates do. A 5% nominal return with 2% inflation means a 3% real return.

Q2: When is this approximation not accurate?
A: For high inflation rates, the exact Fisher equation should be used instead of this simple addition.

Q3: How do central banks use this relationship?
A: Central banks consider real rates when setting nominal policy rates to achieve desired economic effects.

Q4: Why might real rates be negative?
A: When inflation exceeds nominal rates, real rates become negative, meaning money loses purchasing power.

Q5: How does this affect savings and loans?
A: Savers want positive real returns, while borrowers benefit from negative real rates as debt loses value.