what is nominal interest rate 
nominal interest rate refers to the interest rate before taking inflation into account nominal can also refer to the advertised or stated interest rate on a loan without taking into account any fees or compounding of interest investopedia julie bangunderstanding nominal interest ratecentral banks set short term nominal interest rates which form the basis for other interest rates charged by banks and financial institutions nominal interest rates may be held at artificially low levels after a major recession to stimulate economic activity through low real interest rates which encourage consumers to take out loans and spend money 1 however a necessary condition for such stimulus measures is that inflation should not be a present or a near term threat in the united states the federal funds rate the interest rate set by the federal reserve can also be referred to as a nominal rate conversely during inflationary times central banks tend to set nominal rates high unfortunately they may overestimate the inflation level and keep nominal interest rates too high the resulting elevated level of interest rates may have serious economic repercussions as they tend to stall spending nominal rates tend to be high during periods of high inflation nominal interest rates exist in contrast to real interest rates and effective interest rates real interest rates tend to be important to investors and lenders while effective rates are significant for borrowers as well as investors and lenders although the nominal rate is the stated rate associated with a loan it is typically not the rate that the consumer pays rather the consumer pays an effective rate that varies based on fees and the effect of compounding to that end annual percentage rate apr differs from the nominal rate as it takes fees into account and annual percentage yield apy takes both fees and compounding into account the nominal interest rate n for a specified period when the effective interest rate is known can be calculated as n m 1 e 1 m 1 