Nominal Interest Rate Formula

Nominal Interest Rate Formula (Table of Contents)

• Nominal Interest Rate Formula
• Examples of Nominal Interest Rate Formula (With Excel Template)
• Nominal Interest Rate Calculator

Nominal Interest Rate Formula

The nominal rate of interest is the term we hear in economics and finance. The nominal rate of interest we used to know the interest rate excluding the inflation rate. We also can consider a nominal interest rate for calculating interest on loans before taking any factor into consideration. The federal rate can also take it as a nominal interest rate. The nominal interest rate also considers the real interest rate because it is calculated before taking the inflation rate into consideration. A real interest rate is effective to the lender and investor both. There is a difference between real interest rate and nominal interest rate and that difference is inflation. Real interest takes into account inflation and nominal doesn’t take the inflation.

The formula for Nominal Interest Rate –

Examples of Nominal Interest Rate Formula (With Excel Template)

Let’s take an example to understand the calculation in a better manner.

For Ex- If a bank offered a nominal rate on a 4-year deposit is 6% and the inflation rate during the period is 4 % and the real interest rate is 3%.On the other hand, if the nominal interest rate is 5% and the inflation rate is 4% then we can clearly see that the purchasing price of an investor erodes by 1%( 5% – 4%).

Nominal Interest Rate Formula – Example #1

ICICI bank is providing real interest rate which includes inflation 7% on 5-year bond and that time inflation rate is 4% so calculate nominal interest rate during that period of time.

Nominal Interest Rate is calculated using the formula given below

Nominal Interest Rate = Real Interest Rate + Inflation Rate

• Nominal Interest Rate = 7%+4%
• Nominal Interest Rate = 11%

So here we are considered inflation rate in nominal interest rate so in this example we can clearly see that the purchasing power of an investor and consumer erode by 4% and the reason for purchasing price erosion is inflation.

Nominal Interest Rate Formula – Example #2

HDFC Ltd is the third number of private sector bank. HDFC bank is providing 8% of return to their customers if they kept deposit more than 5 years. And the inflation rate at that time is 3% so from above information calculate the nominal interest rate which bank can use for the calculation of return amount.

Nominal Interest Rate is calculated using the formula given below

Nominal Interest Rate = Real Interest Rate + Inflation Rate

• Nominal Interest Rate = 8% + 3%
• Nominal Interest Rate = 11%

Nominal Interest Rate Formula – Example #3

Lakshmi Vilas Bank is newly come to the market and wants to attract customer money through deposits, for this they come with the scheme that they will provide 9% of return if customers deposit their money for 3 years and the inflation rate in that particular time period is 4%. From the data available calculate the nominal interest rate.

Nominal Interest Rate is calculated using the formula given below

Nominal Interest Rate = Real Interest Rate + Inflation Rate

• Nominal Interest Rate = 9% + 4%
• Nominal Interest Rate = 13%

Explanation

In Nominal Interest two major things we consider and that is the real interest rate and the inflation rate for a particular period of time. Nominal interest rate basically called the rate which we can use to calculate the return for borrower and lender both. The nominal interest rate was also used by the feral for the federal reserve. The nominal interest rate includes the real rate of return which does not include the inflation rate. For the calculation of nominal interest, we must consider inflation because inflation is one of the major things which erose the purchasing power, so for calculating the exact return, we must include inflation in it. So in nominal interest rate, we have to make a total of real interest rate and inflation during the particular period.

Relevance and Uses of Nominal Interest Rate Formula

• The nominal interest rate has relevance in the banking world and finance and economics term.
• Nominal interest also used by banks to calculate the interest on a loan.
• A nominal interest rate is a rate calculated by the federal reserve.
• To avoid purchasing price erosion through inflation.
• The central bank set short term nominal interest rate, which forms the basis for other interest rate charged by the other banks and financial.

So Nominal interest rate which particularly not taking inflation into consideration, so with the actual or real interest rate we have to add inflation to get a nominal rate of return which used by many banks for calculating interest for lender and it is also useful for borrower who wants to take loan from bank for particular time being. Even federal reserve used this nominal rate. We can say nominal interest rate as a benchmark which is used by other banks. Nominal rate of return held low at the time of recession which means that low-interest rate and therefore people taking loan and spending more so there are chances of overflow of a money in the economy so nominal interest rate play very important role because central bank calculates the nominal rate and that rate used by all bank for lending and borrowing purpose.

Nominal Interest Rate Calculator

You can use the following Nominal Interest Rate Calculator

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