Understanding Nominal Debt: Definition, Impact & Real Value

Money has no value until it changes hands

Nominal debts have not been adjusted for factors like inflation. It refers to the current value of the debt.

Significance

When looking at how much a debt eventually will cost, you need to consider other factors. For example, the true cost of a mortgage must factor in inflation, tax deduction benefits and home appreciation.

Real debt value

The real value of a debt reflects external factors.

Nominal debt example

Let's say you borrow $100 at 10 percent interest to be paid in a year. At the end of a year, the nominal value of that loan is $110. The lender made a $10 profit.

Real debt example

Using that same example, let's say the annual inflation rate was 3 percent. That means your $100 was worth $103 at year's end. You pay the lender $110 according to the terms of the loan, which means that once the debt is adjusted for its real value of $103, the lender actually made $7. His real return was 7 percent, not 10 percent.

Factors

Market forces, alternative costs and overhead are examples of additional factors that affect real value.