A Comparison Between the Nominal Rate and İnterest Rate
Generally speaking, an interest rate is the cost that a borrower pays for the privilege the borrow money from a creditor. İt is usually expressed as a percentage of total amount of loan. They can basically be thought about the rental charge on the board capital. But there are two common ways actually measuring the cost or borrowing money. First is the nominal interest rate. The nominal interest rate is simply the stated interest rate or coupon of a bond. İt’s not account for inflation. For example if a bond has a coupon interest rate 5% then nominal interest rate is also 5% and if the bond coupon interest rate that is the rate which the general level prices for goods and services increases over time can significantly the cost of borrowing money.
Unfortunately, the nominal interest rate fails to account for the stagflations and inflation rate. As the result providing any complete picture cost the borrowing money by accounting effects of changing inflation rate on loans. The real interest rate reflect the actual cost of borrowing capital for borrower and the true actual yield of lender and this calculate by subtracting inflation rate actual or expected from the nominal interest rate and equation known as the feature equation.
Generally high inflation is harmful the creditors because they are affected the landing more valuable money and this back less valuable money on majority. On the other hand high inflation is beneficial the borrowers because while they have to pay back the face value the loan of majority. They are affectably paying back less than that because of the D-valuation of the currency. The longer the term of loan more significant the potential affect of inflation. The benefit of real interest rate is the buying corporating inflations and calculations. You can assess whether on expecting the particular yield; you actually gaining or losing purchasing power overtime. So in order to avoid the power of inflation, the best usually consideration is the real interest rate rather than nominal rate.