where 
for example if a loan s stated nominal rate is 8 and it s compounded semi annually then the effective interest rate e would be e 1 08 2 2 1 8 16 treasury inflation protected securities tips allow investors to preserve their savings without losing value to inflation nominal vs real interest ratesunlike the nominal rate the real interest rate takes the inflation rate into account the equation that links nominal and real interest rates can be approximated as nominal rate real interest rate inflation rate or nominal rate inflation rate real interest rate to avoid purchasing power erosion through inflation investors consider the real interest rate rather than the nominal rate one way to estimate the real rate of return in the united states is to observe the interest rates on treasury inflation protected securities tips 2 the difference between the yield on a treasury bond and the yield on tips of the same maturity provides an estimate of inflation expectations in the economy 3for example if the nominal interest rate offered on a three year deposit is 4 and the inflation rate over this period is 3 the investor s real rate of return is 1 on the other hand if the nominal interest rate is 2 in an environment of 3 annual inflation the investor s purchasing power erodes by 1 per year 