The interest rate that is expressed and shown as a percentage interest on the “face” of a bond or a loan document. The nominal interest rate may not correctly indicate the interest actually paid because the nominal rate does not consider the number of times interest compounds. Therefore, this measure of interest rate is not a precise yield figure. Instead, the effective interest rate is used. For example, the annual effective rate (AER), for a semiannual compounding, represents the actual interest rate earned on the money lent, based on 2-time compounding.

The nominal interest rate is the interest rate stated on a debt security/ instrument. It is also referred to as the face interest rate or coupon rate.