The nominal interest rate is the stated rate before accounting for compounding or inflation. It differs from the effective rate (which accounts for compounding) and the real rate (which accounts for inflation). Most loan rates are quoted as nominal annual rates.
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Pro Tip
When evaluating investment returns, always consider the real (inflation-adjusted) rate. A 5% savings account in a 4% inflation environment provides only ~1% real return on your purchasing power.
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Did You Know?
In economics, the "zero lower bound" is the problem where nominal rates can't go below 0% (in theory, people would just hold cash). Several countries have tried negative nominal rates — Denmark, Switzerland, Japan — with mixed results.
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