Question

What is the difference between nominal and real interest rates and why should you care?

Answer 1

  

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Nominal Return is the return which is exclusive of the Inflation rate. When we earn any return on any security, we get a return but that return is not actually what we have earned becuase inflation eats up the return.

Now, the return without the inflation is called as Real Return. That is return in real terms which defines the purchasing power.

Inflation is approximately = Nominal Return - Real Return (Remember Approximately)

We should care as we want to know how much we have earned on any security in real terms or how much of our return is eaten by the inflation