MANAGEMENT

Detailed explanation-1: -According to the Fisher Effect, nominal interest rate equals real interest rate plus the expected inflation rate. In contrast to effective interest rate, the nominal interest rate refers to the rate specified in the loan contract without adjusting for compounding.

Detailed explanation-2: -A real interest rate reflects the rate of time preference for current goods over future goods. For an investment, a real interest rate is calculated as the difference between the nominal interest rate and the inflation rate: Real interest rate = nominal interest rate-rate of inflation (expected or actual).

Detailed explanation-3: -The nominal interest rate is composed of the real interest rate plus a premium for inflation expectations. The nominal interest rate is not adjusted for true inflation, and is quoted on many financial products such as loans or savings accounts.

Detailed explanation-4: -But the nominal interest rate doesn’t take inflation into account. In other words, it is unadjusted for inflation.

Detailed explanation-5: -When expected inflation changes, the nominal interest rate will increase.