Interest rates influence the cost of borrowing, the return on savings, and are an important component of the total return of many investments. Moreover, certain interest rates provide insight into future economic and financial market activity.
Nominal interest rate refers to the interest rate before taking inflation into account.
Formula to calculate nominal interest rate.
Inflation rate refers to the rise in the prices of most goods and services of daily or common use.
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.
Example:
Suppose the inflation rate of an economy is 4% and the real interest rate is 3%. Calculate the nominal interest rate.
Therefore, the economy’s nominal interest is 7%.
