Nominal Interest Rate
Definition
The nominal interest rate refers to the percentage increase in money value that a lender receives from a borrower as compensation for lending money.
Analogy
Think of the nominal interest rate as the "rent" you pay for borrowing money. Just like you pay rent to live in someone else's property, borrowers pay interest (rent) to lenders for using their money.
Related terms
Real Interest Rate: The nominal interest rate adjusted for inflation.
Federal Reserve (Fed): The central bank of the United States responsible for setting monetary policy and controlling interest rates.
Loanable Funds Market: A market where borrowers and lenders interact to determine the interest rate and quantity of loanable funds exchanged.
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