Why should investors know the difference between nominal and real interest rates brainly
Interest is an amount charged by lenders above and beyond the principal repayment amount of a loan. When analyzing interest rates, investors compare nominal interest rates against real interest rates to determine the future value of an investment made today. Understanding the difference between nominal and real Chart 1 illustrates that there is certainly a difference between the real and nominal interest rates. This difference gives us an idea of the current inflation premium. Interest Rates in the Real World Advertised interest rates that you may see at banks or other financial service providers are typically nominal interest rates. When the loan is made, what the actual inflation rate will be is unknown, so the expected rate of inflation over the loan's period is used in the formula. Thus, in the example above, since the lender expects inflation to be zero, the nominal rate = the real rate = 10 percent.