Talk:Nominal interest rate

Some Notes

First, the equation given "real interest rate + expected inflation = nominal inflation rate," might read "real interest rate + expected inflation = nominal interest rate". I have never heard of a nominal inflation rate in macroeconomic theory. Moreover, wikipedia should not that this is an approximation. The equation relating the three is (1+R)/(1+pi)=1+r where R is nominal, pi is inflation, r is real. Gkapur 19:40, 12 March 2007 (UTC)Gkapur

I have added a reference to Brealy & Meyers affirming your position. (Brealy & Meyers is the standard book of corporate finance used by MBA programs - Harvard, London Business School among them) - if it isn't authoritive we've got a lot of confused investment bankers out there :-) Egfrank 10:44, 21 March 2007 (UTC)

I agree -- there is no such thing in macroeconomic theory as a nominal inflation rate since by definition inflation is a nominal term. Nominal terms are those denoted in money or price terms: divided by a price,price level, or currency. Real terms are not monetary values but are expressed in real terms. So, in macroeconomic theory-not accounting theory, the nominal interest rate is approximately the real rate or basic interest rate ( real rate of growth-how mucch corn can be produced from a certain amount of seed in one year or what someone would have to compensate you in corn for deferring planting of seed for one year)divided by the price level PLUS the anticipated inflation rate (which is the expected change in the price level over the price level-ie: a nominal term). oR: i = R/P + dPe/P where i= the nominal interest rate R = the real rate or basic rate P = the Price level/ or Price dPe= the expected or anticipated change in the price level by consumers/investors These terms can be found in Macroeconomic Textbooks. JFW —Preceding unsigned comment added by 24.205.75.208 (talk) 19:12, August 30, 2007 (UTC)

I (unsigned) removed this:

This is one of the greatest misnomers in economics. If real interest rate is the real rate of interest, the nominal interest rate is not the real thing. In fact it is the sum of the expected real interest rate plus the expected inflation rate over the duration of the loan. Its adding apples and pears. Nominal interest rate is not an interest rate at all, but the sum of two different concepts in economics.

Adding Two Uncertainties

The sum of these two uncertain estimates does not give a secure and trustworthy interest rate as most people have come to trust. It is definetely not a deterministic quantity for the investor to make rational decisions by. The investor ends up not knowing what the real interest rate of investment will be, as opposed to securities that deliberaty guarantee a real rate like today's TIPS (Treasury Inflation Protected Securities).

Many other countries do not make this mistake, preferring to call a spade a spade. However, one should be cautious to state exactly what they mean in countries with fewer protections for borrowers given fraudulent information, for example Chile or Brasil. "

I don't know what this has to do with nominal interest rates, and besides it was badly-written and pov, so I removed it. saturnight 16:26, Jun 14, 2005 (UTC)

Nominal interest rate definition here differs from most sources

The recent changes seem to exclude a valid definition, that is, nominal interest rates are the stated annual rate without proper adjusting for compounding. See, for example, http://www.getobjects.com/Components/Finance/TVM/iy.html . If there is a disagreement about the use of this term, grateful it be documented.

And to say it is used "instead of simple interest" appears to understate the situation: they are distinct and different. If it is used instead of simple interest, it is used incorrectly. See for example the financial dictionary at http://www.specialinvestor.com/dictionary/ where nominal interest is precisely defined: Nominal interest: Definition An effective rate per period multiplied by the number of periods in a year.

From msn encarta: simple interest - interest that is not compounded (more at their page).

I am editing back to include useful definition and example, please document objections if any.--Gregalton 02:44, 5 February 2007 (UTC)

I'm uncomfortable with the second definition contrasting the stated rate to the effective rate. If we must keep a second definition, I would feel more comfortable saying that "in some contexts, the term 'nominal interest rate' refers to the stated periodic rate as opposed to the simple per annum rate."

In the GetObject interest artticle, the interest rate being refered to as the stated or nominal rate is in fact the "periodic rate". It should be noted that a rate expressed in absense of a compounding period is essentially meaningless. Thus the "stated rate" on any contract always presumes two numbers: the periodic rate and the length of the period. If the period is unstated it is normally implied by convention. For example an inflation rate of 3% usually means 3% per annum.

However, I do think this is non-standard usage and potentially very confusing. standard textbooks such as Brealey and Meyers do not use it this way at all. If the "stated rate" is the nominal rate, then two very different periodic rates can be the same nominal rate. Because we have both the periodic rate and the period length we can always convert it to an equivalent pair with a different period rate or compounding period - be it yearly, monthly, daily, or continuous. Thus a nominal rate of 10% compounded every six months is equivalent to a 12% per annum rate. Both are the same nominal rate even though the periodic rate is quite different.

As for authoritive sources of the definition of "nominal interest rate", I can't find evidence.

Brealey & Meyers (Principles of Corporate Finance) glossary:

• Interest rate expressed in money terms

-- No mention of it beingc a synonym for simple interest rate. Brealy & Meyer do not use nominal interst at all when discussing compounding - rather they talk about the periodic rate.

Reuters Financial glossary:

• The interest rate expressed in money terms, with no allowance made for the effects of inflation. In contrast with real interest rates, which are nominal rates minus inflation.

-- again no mention of simple rates.

The only confirmed source that uses "nominal rate" to mean simple rate is GetObject interest artticle. However, this doesn't cite sources so I would treat it as less authoritive than the above.

encarta: predetermined rate of interest: an interest rate given in a contract, which applies irrespective of inflation -- again no mention of simple rates, despite the above citation. But since this doesn't cite its source I'm not comfortable depending on it.

Egfrank 12:56, 21 March 2007 (UTC)

I object to it being removed. If you'd prefer to have more citations or sources, that's a different request. But please don't remove. I am also entirely unclear what you mean by "simple". Simple interest is an entirely different issue.--Gregalton 12:40, 21 March 2007 (UTC)

I would like to add: I'm not sure I agree with the premise, that a usage that is common and colloquial should not figure here. The text makes no argument that one use or another is more "correct," simply that they are used. You seem to be referring only to dictionaries/glossaries.--Gregalton 12:46, 21 March 2007 (UTC)

At any rate, regardless of opinions about whether this constitutes colloquial usage, which are more authoritative, etc., etc., here is a link that I believe meets any reasonable standard. [1], Contemporary Financial Management (with Thomson One - Business School Edition and Infotrac) By R. Charles Moyer, James R. McGuigan, William J. Kretlow, pg. 163. Best regards,--Gregalton 12:54, 21 March 2007 (UTC)

Thanks for responding so soon. The citation is helpful and definitely qualifies as authorative IMHO. But I still think "stated" is unclear. Periodic rate is unambiguous and deals with the fact that the "stated rate" normally has two components the periodic rate and the compounding period. Egfrank 13:05, 21 March 2007 (UTC)

I have no difficulty with periodic being a related term, although I have usually heard the periodic rate as being per period, i.e. per month for monthly compounding. And you are quite right that two different nominal rates are quite ambiguous - they DO NOT have sufficient information to tell you the effective annual rate without the compounding period. But, for example, how often do you see advertisements that say 8% APR or 8% per year (if you live in the US)? In ads this issue is often glossed over - but in the US the rate is usually nominal per year (i.e. compounding monthly). So, I would highly support putting more information here that "red flags" the fact that a nominal rate without a compounding period is not sufficient (it's underspecified). I also agree that convention should dictate this, and it should be a well-understood convention (always annual compounding unless specified), but I've seen this come up often enough - particularly for consumer products - that I can say that these conventions are violated frequently.--Gregalton 13:17, 21 March 2007 (UTC)

One final note: 'nominal annual rate' redirects here (as of today). Any search for nominal annual rate will turn up lots of hits defining this term. While it would of course be possible to split the pages, my own view is that nominal interest rate, nominal annual rate, nominal annual interest rate are incredibly similar in sound and usage; best to deal with both senses from one page. There is sufficient documentation to show that both senses get used.--Gregalton 13:26, 21 March 2007 (UTC)

All the more reason to make things clearer. So if we agree that "periodic rate" or "rate per period" followed by a discussion of the fact that the "stated rate" actually consists of two quantities: rate per period and compounding period - how should the second definition be reworded? Egfrank 13:32, 21 March 2007 (UTC)

IMHO the fact that most people do not realize they haven't done their research on their new credit card until they have both the rate per period and the compounding period is all the more reason this definition of "stated rate" needs to clarify that it implies both. N.B. the formula in your cited source would be unusable without the compounding period because we would have no way of knowing the value of n Egfrank 13:35, 21 March 2007 (UTC)

Take a look at the changes I've made - mainly a para to warn about the issue, as well as example with daily compounding. I'm not sure if this is what you're thinking but worth a try.--Gregalton 13:54, 21 March 2007 (UTC)

Another site link, encarta: which has used both of the senses in this wikiarticle under nominal annual rate. So perhaps this is sufficient to establish that nominal interest rate and nominal annual rate are effectively synonyms with two distinct senses; one might be used more frequently to mean definition A and the other more frequently for definition B, but they are both used and confused interchangeably.[2]--Gregalton 13:59, 21 March 2007 (UTC)

Exactly what I had in mind. Great work. I agree with you about the source of the confusion. User:Egfrank 16:13, 21 March 2007 (UTC)

Please stop this senseless redirect war

There are two distinct senses to nominal interest rate, which have been clearly documented. The page to which redirections are being done does not cover one of these senses, which is an important distinction. To sum up: 1) Nominal interest rate: nominal - inflation = real interest rate. 2) Nominal interest rate: nominal annual, not adjusted for compounding (i.e. 12% compounded monthly is 1% compounded monthly. See references above. Effective annual rate is different. Simple interest is different.

Redirection and editing the page with comments under the redirection is not constructive; dialogue should take place on the discussion page before destroying content. There is a difference of opinion about how this should be expressed and possibly the underlying meaning. Please demonstrate and document what you are trying to express. You have had an opportunity to provide documentation and references, and have not done so.--Gregalton 20:00, 8 February 2007 (UTC)

So that the discussion is clear, the following was posted on the article page directly by RetailInvestor (pls see diffs if interested): " 1. REDIRECT Real interest rate

Nominal does not equal simple. See Real versus nominal value and nominal (disambiguation) and interest and Real interest rate.

Please use common sense. If you are editing these pages you should know how often terms are used wrongly. Since the basis of nominal rates (as apposed to real rates) is the equivalent compounded rate, you are deciding that the term means two exactly opposites."

1) Agreed, nominal does not equal simple. Nominal is compounding, unadjusted for the number of compounding periods (i.e. nominal equals periodic rate * number of periods per year); nominal also has a separate, distinct meaning (in current text) which is before accounting for inflation. Simple interest is without compounding.

2) Real vs nominal value appears to be about inflation. Not the same. Nominal (disambiguation) is not exhaustive, and should be amended. Real interest rate only refers to one of the two important senses documented.

3) I have tried to use common sense, including providing dictionary definitions as a basis for understanding. I am also aware that these terms are used incorrectly, which calls for more precision.

It would help if an attempt were made to document what you disagree with, and on what basis.

Regards.--Gregalton 20:27, 8 February 2007 (UTC)

Rather than redirect, could you explain what your position is?

It is not clear to me. Perhaps by communicating what it is your objection is, we could find some compromise. Without knowing it, however, it appears to be no more than a destructive edit to avoid the issue.--Gregalton 17:46, 10 February 2007 (UTC)

Agreed. This is ridiculous. This article should not be redirected again without prior discussion on the talk page. As a sop to Retail Investor, I've added Real versus nominal value (economics) to the "see also" section. There's no excuse for another unilateral redirect. PubliusFL 21:38, 15 February 2007 (UTC)

This page is wrong

1. Your position that "no explaination of position yet communicated" is wrong. 1) Look in the Talk history Sept 9,2006. I stated my proposed changes. I waited until Feb 4 with no disagreements before making the changes. 2) My position was clearly stated in the rewrite that I posted on Feb 4. 3) The position that there are two dicotomies: simple vs. compound and real vs nominal was used to document the reason for change. 4) References for my position were provided (See Real versus nominal value and nominal (disambiguation) and interest and Real interest rate) on the redirect page that was read by Gregalton Feb 8.
2. I already know that Gregalton does not understand the concepts of compounding and refuses to admit his error once proved wrong with his own references. See the discussion on compound interest that started when he refused to allow my post on that page. It starts on his home page. His ramblings are always off topic and he mistates your position. He tops it off with condescending "I'll try to explain this to you...".
3. This will be my last posting. I find this community governed by people who think they know what they don't. (I am fully aware you are thinking that about me, right now).Retail Investor 20:09, 16 February 2007 (UTC)

To reinstate the text from Sept 9 that apparently constitutes the position: "== Close and Redirect this page== While I know that one definition of nominal is "in name only", I don't agree that what this page states is true. The problems caused by compounding and failing to quote the Effective annual rate are nothing to do with the term 'nominal interest'. I believe the term 'nominal interest' is only used to distinguish it from 'real interest'. Real interest = nominal interest less inflation. Retail Investor 19:17, 9 September 2006 (UTC) (My emphasis)

Here are several places that use the term in the other sense: [3], [4], [5]. Note the final one uses both definitions, supporting that there is more than one sense. Here [6] is one text: "The nominal rate of interest (denoted i(m) ) is a rate of interest payable m times per investment period. That is, the rate earned is i(m)/m for each m of a period." Or another reference: "To convert a nominal rate to an equivalent effective rate: Effective Rate = (1 + (i / n))^n - 1". Nominal interest is clearly used in another sense than the one stated.

From these pages, it is clear that a) nominal interest does have something to do with effective rates/compounding, at least some of the time, and b) the term is not only used to distinguish it from real interest, as you assert.

As noted above, a disambiguation page cannot be interpreted as exhaustive. Since this is a difference of opinion about fact, please provide external citations rather than just internal ones.

You may want to consider allowing a more generous interpretation of phrases like "I'll try to explain this to you...". You assume it is meant to be condescending; a good faith interpretation might be that I am not sure I'm good at explaining it.

I'm having difficulty, however, ascribing similar good faith to your repeated assertions that I don't understand, while I can at least document my position. We have differences of opinion, fine; we have different standards for what constitutes proof, fine; but there is still no need to be insulting.--Gregalton 01:57, 17 February 2007 (UTC)

The sentence seems incomplete: Last sentence in "Nominal versus real interest rate." "In contrast, the nominal interest rate is..." In contrast, the nominal interest rate is —Preceding unsigned comment added by 125.22.34.38 (talk) 13:16, 26 November 2008 (UTC)

Nominal versus real interest rate

What happens with a negative inflation of i=-1? And the second formula seems exact to me.

Darcourse (talk) 06:07, 29 October 2020 (UTC)