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Finance: What is Nominal Rate? 32 Views

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What is nominal rate? Nominal rates are just interest rates that leave out certain figures. Typically, these figures are things like inflation or fees charged by a loan issuer. If nominal rates are advertised, investors need to take into account the inflation that’s expected over the period of their investment or loan to get a realistic idea of what will be made or paid.

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Transcript

00:00
finance a la shmoop. what is the nominal rate?
00:05
hmm well a nominal rate is the named rate of interest on a bond. here's a bond
00:14
Eastern Airlines famously bankrupt a zillion years ago. but what's key here is [bond shown]
00:20
the nominal rate on the face of the bond right here. that .you see that 11 and 3/4
00:28
percent thing? that's the nominal rate the named rate of interest on the bond.

00:34
but when the bond was sold it was actually somewhat better than lukewarm
00:38
or almost hot offering and it sold for a hundred five cents on the dollar or a
00:43
five percent premium to the nominal rate. so investors did not in fact receive the [woman holds bond]
00:48
nominal rate because they paid slightly more than the thousand dollars our value
00:53
of the bond. they paid a thousand fifty. so instead they received eleven point
00:59
seven five divided by 1.05 or about eleven point two percent in interest.
01:07
that was the real return they got. the 11 and three-quarters percent? yeah that's [equation shown]
01:12
the nominal. rate the named rate and the performance of the bond well, it was not
01:18
phenomenal. [graph shows bankruptcy]
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