Nominal rate — definition
Nominal rate of return is profit from investment before adjusting for inflation. How it differs from real rate and why it can be misleading.
What is nominal rate of return?
Nominal rate of return is investment profit expressed as a percentage, without inflation adjustment. It's the number you see in deposit advertisements, bond contracts, or portfolio summaries.
Nominal vs real
| Nominal | Real | |
|---|---|---|
| Includes inflation? | No | Yes |
| What does it tell? | How much you earned in PLN | How much you earned in purchasing power |
| Where will you see it? | Bank, broker, report | You need to calculate it yourself |
Example
Deposit: 6% nominally. Inflation: 4%.
- Nominally you earned 6% — on 10,000 PLN that's 600 PLN
- Really you earned ~2% — your purchasing power increased by ~200 PLN
Why can nominal rate be misleading?
Banks and financial institutions always quote nominal rates — because they look better. "7% deposit!" sounds great, but with 5% inflation, it's really only 2%.
The high nominal rates trap
In countries with high inflation (Turkey, Argentina), nominal rates can be 30-50%, while real returns are negative. In Poland in 2022, deposits offered 6-8%, but inflation reached 14% — every PLN on deposit was losing real value.
Nominal interest rate and credit
In the context of loans, the nominal rate is interest before accounting for fees and charges. That's why RRSO (Rzeczywista Roczna Stopa Oprocentowania - Actual Annual Percentage Rate) is more important, as it includes all costs.
How to convert?
Real ≈ Nominal − Inflation
Always compare investments in real terms, not nominal ones. A 6% deposit with 4% inflation is worse than an ETF giving 10% with the same inflation (2% vs 6% real).
How can Freenance help
Freenance presents your portfolio results both nominally and real. Don't be fooled by "pretty" percentages — check how much you're really earning after accounting for inflation.
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