Accounting Dictionary

Nominal Interest Rate

This is the interest rate written on a debt instrument. It does not take into account selling price, inflation or other factors.

ABC Company issued $10,000 in bonds at 10% interest for an interest payment of $1000 a year. No one was interested in buying their bonds and they ended up selling the bonds for $5000. ABC still has to pay $1000 in interest every year, but they only received $5000. They are actually paying 20% interest every year ($1000/5000) but the nominal rate, the rate printed on the bond is 10%.

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