Economics Time Value Of Money Questions Medium
The concept of nominal interest rate in the context of time value of money refers to the stated or advertised interest rate on a financial instrument or investment. It represents the rate at which money grows over time without taking into account the effects of inflation or compounding.
Nominal interest rate is typically expressed as an annual percentage and is used to calculate the future value of an investment or the amount of interest earned on a loan or deposit. It is important to note that the nominal interest rate does not consider the impact of inflation, which erodes the purchasing power of money over time.
To account for inflation and the true value of money, the concept of real interest rate is used. The real interest rate adjusts the nominal interest rate by subtracting the inflation rate, providing a more accurate measure of the growth or return on an investment.
In summary, the nominal interest rate is the stated rate of return on an investment or the cost of borrowing money, without considering the effects of inflation. It is an important factor in the time value of money calculations, but to accurately assess the value of an investment or loan, the real interest rate should be considered.