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DEFINITION of 'Nominal Interest Rate'. The interest rate before taking inflation into account. The nominal interest rate is the rate quoted in loan and deposit agreements. The equation that links nominal and real interest rates is: (1 + nominal rate) = (1 + real interest rate) (1 + inflation rate).
If the prime rate is at 3.25% and a bank customer is making a Variable Rate deposit of $100,000 at two percentage points below the prime rate, this would mean that they would receive an effective interest rate of 1.25% on the deposit while the prime rate remained at 3.25%.