Nominal Rate of Return

The nominal rate of return is the percentage gain or loss on an investment before accounting for taxes, fees, and inflation. It measures raw performance and is useful for comparing investments on a like-for-like basis before external factors are considered.

Key takeaways

• Nominal return = change in market value divided by the original investment.
• It excludes taxes, fees, and inflation, so it does not represent the investor’s purchasing-power gain.
• Use nominal return to compare gross performance across investments; use real or after-tax returns to assess actual investor outcomes.

Definition and formula

Nominal rate of return = (Current market value − Original investment value) / Original investment value

To express as a percentage, multiply the result by 100.

How to calculate

1. Subtract the original investment (principal) from the current market value at the end of the period.
2. Divide that difference by the original investment.
3. Multiply by 100 to convert to a percentage.

Example:
An investment of $100,000 grows to $108,000 in one year.
Nominal return = ($108,000 − $100,000) / $100,000 = 0.08 = 8%

Nominal vs. real rate of return

The real rate of return adjusts the nominal return for inflation to show the change in purchasing power.

Approximate relationship:
Real ≈ Nominal − Inflation

Exact relationship:
Real = (1 + Nominal) / (1 + Inflation) − 1

Use the real return to understand how much of the nominal gain is an actual increase in value after prices rise.

Nominal vs. after-tax rate of return

After-tax return accounts for taxes levied on investment income and gains. Taxes vary by:
* Type of investment (e.g., municipal bonds are often tax-exempt; corporate bond income is taxable).
* Holding period (short-term vs. long-term capital gains).
* Investor tax bracket.

Two investors with the same nominal return can have different after-tax returns. Compare after-tax returns when taxes materially affect investment outcomes.

Limitations

• Does not account for inflation — can overstate real gains.
• Ignores taxes and fees — can overstate what investors actually keep.
• Time value and compounding across multiple periods require geometric returns (CAGR) rather than a simple nominal percentage for multi-period comparisons.
• Not sufficient alone for making investment decisions; should be used alongside real and after-tax measures.

Practical use

Track nominal returns to monitor gross performance of portfolio components and to compare investments on a pre-tax, pre-inflation basis. Then adjust to real and after-tax returns to evaluate true economic benefit and make informed allocation or tax-planning decisions.