How to Find Nominal Interest Rate
Are you having a hard time on how to find nominal interest rate on your investment or bonds?
Finding the nominal interest rate will be easy if you know the basics of economics, to enlighten up your mind about the nominal interest rate here are some details about the topic and other things you should learn about your investment.
Finding the Nominal Interest Rate and its Definition
Economics can be an interesting topic if you simply know the basics particularly if you have enough knowledge in defining the different interest rates involving in an investment. Every business must learn the value of the interest rates since this factor is very important in determining if the business will prosper or not. For borrowers, it is also imperative for him to learn the interest rates involved on his loan so he have a clear idea if the rate is reasonable and worth paying for. This is the usual predicament of borrowers if they are not aware of the interest rates charged on their loan accounts particularly on their credit cards.
Let’s have a clear definition first of the word “interest”. In economics, interest is defined as the “price paid for the borrowed money”, and likewise the amount of money earned through deposited funds in a bank. For example, if you have opened a savings account with a local bank with an amount of $1,000.00; and after a year you have updated your account then it indicates an amount of $1,050.00, therefore your account earned an interest of $50. Same also in loans and borrowed money, any excess amount you are paying aside from the actual value of your loan is the interest charged by the lender. Hence, interest rates are the percentage applied on the principal amount over a period of time.
Moreover, understanding the nominal interest rate is very simple; it is the interest rate itself without the factor of inflation and any adjustment that might caused by compounding. For instance, if the standard interest rate is 5% as indicated by the lender then it is the nominal interest rate as well. However, the value of interest rate may vary depending on the effect of inflation. Inflation is a factor that affects the pricing of goods and services in a certain economy within a period of time.
How do you Find Nominal Interest Rate Accurately with other Factors
On the other hand, the nominal interest rate is not the actual value since there are other factors that can affect the interest rate such as rate of inflation in the economy. Real interest rate is the term applied if the inflation rate is being subtracted from the nominal rate. Going back to the previous example, if the nominal interest rate charged is 5% then after a year due to the inflation rate of 3%, the real interest rate would be 2% based on the formula given: Real Interest Rate = Nominal Interest Rate – Inflation Rate.