Certified Residential Appraiser Practice Exam

What does the nominal interest rate refer to?

1. Effective interest rate after expenses

2. Stated or contracted interest rate

3. Interest rate adjusted for inflation

4. Rate calculated on a monthly basis

The correct answer is: Stated or contracted interest rate

The nominal interest rate refers to the stated or contracted interest rate on a loan or financial instrument, without taking into account any compounding, fees, or inflation adjustments. It is the rate that is usually advertised and agreed upon between a borrower and lender, representing the percentage return on the principal over a specific time period. This term encompasses the raw figure used to gauge the cost of borrowing or the return on investment, without additional considerations that might affect the actual value of that return or cost. Understanding this term is essential in finance and real estate as it helps borrowers and investors make informed decisions based on the face value of interest rates before considering how other factors might affect the effective return or cost over time. It is important to differentiate this from other concepts like the effective interest rate, which takes compounding into account, and the real interest rate, which is adjusted for inflation, as those calculations provide a more nuanced view of the financial implications of an interest rate in practice.