## What is Nominal Interest Rate?

The **Nominal Interest Rate** reflects the stated cost of borrowing before adjusting for the effects of unexpected inflation.

## How to Calculate Nominal Interest Rate

The nominal interest rate is defined as the stated pricing on a financial instrument, which could be related to debt financing such as a loan or a yield-generating investment.

For the everyday consumer, the nominal interest rate is the price quoted on items such as credit cards, mortgages, and savings accounts offered by banks.

**The nominal interest rate remains fixed irrespective of the actual inflation rate.**

For instance, if new economic data is released that favors the borrower, the interest rate received by the lender is kept the same.

Higher-than-expected inflation can erode the yield earned by a lender because a dollar now is worth less than a dollar on the original date on which the financing arrangement was agreed upon.

In effect, the borrower (i.e. the debtor) tends to benefit from periods of high inflation at the expense of the lender (i.e. the creditor).

Calculating the nominal interest rate requires two inputs:

**Real Interest Rate ➝**The real interest rate is the actual yield on an investment after adjusting for inflation.**Inflation Rate ➝**The rate of inflation refers to the percent increase or decrease in the Consumer Price Index (CPI), which measures the average change over time in the pricing of a market basket consisting of consumer goods and services.

## Nominal Interest Rate Formula

The formula for calculating the nominal interest rate is as follows.

**Nominal Interest Rate (i) =**[(1

**+**r)

**×**(1

**+**π)]

**–**1

Where:

- r = Real Interest Rate
- i = Nominal Interest Rate
- π = Inflation Rate

Note that as a rough approximation, the following equation can be used with reasonable accuracy.

**Nominal Interest Rate (i) =**r

**+**π