Nominal

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What do you mean “at face value” means

Nominal may refer to one of two definitions. This means a very small or far below the real value or cost, and Finance, this adjective modifies such words as pay, or the cost. Just a nominal fee relates to the fee that is below the cost of the services or probably easy for consumers to afford, or a fee that is small enough that it does not have any significant impact on finances.

Most often in the area of Finance and economy, the nominal can also refer to without amendment of the course or of changes in value. In the description of concepts such as interest rates or GDP, nominal refers to their rate without adjustments for inflation, Seasonality, and interest, among other factors. Using this method, par-in contrast to “real” economic indicators that make these adjustments.

Breaking down the “nominal”

In contrast to the nominal, real expresses the value of something after adjusting for various factors, to create a more accurate measurement. For example, the difference between nominal and real GDP is nominal GDP measures the volume of production in the country using current market prices and real GDP takes inflation into account for more accurate measurement.

Nominal and real yield

The rate of return is the amount which the investor receives from the investment. While the nominal rate of return reflects the income of the investor as a percentage of its initial investment, the real interest rate takes into account inflation. In the result, the real interest rate provides a more accurate assessment of the real purchasing power of income of the investor.

To illustrate, imagine that you buy a share of $ 10,000 and sell it next year for $11,000. Your nominal rate of return is 10%. However, to get a more accurate picture of your actual return, this indicator should be adjusted for inflation because the purchasing power of your money is likely to have changed in one year. So, if inflation for that year is 4%, the real rate of return is 6% and the nominal rate minus the inflation rate.

Nominal and real interest rates

As the difference between nominal and real yields, the difference between nominal and real interest rates is that the latter is adjusted for inflation. However, from the point of view of interest, the nominal rate also contrasts with the annual percentage rate (Apr) and annual percentage yield (APY). In this case, the nominal or stated rate is the rate that the lender advertises, and is the main interest rate the consumer pays on the loan.

April, by contrast, takes into account fees and other costs associated with the loan and it calculates the interest rate with respect to the aforementioned factors. For example, suppose a borrower takes out a loan of $1000 with a 5% nominal interest rate, but he also paid the Commission for the organization of $100. In the first year of the loan, it faces $ 50 in interest payments, but when you take the Commission for organizing the count, he pays $ 150 in fees and interest. This corresponds to 15% per annum. Conversely, UPS takes the two charges and the effect of compounding into account, to give the borrower even more accurate picture of its interest rate.

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