What is the difference between real and nominal interest rates? Which one should an investor be concerned with

As an investor, you should be concerned with your real interest rate, which requires a knowledge of the nominal interest rate and the inflation rate. The relationship between these three is very simple. The nominal interest rate is the actual interest rate. There is nothing special about it. The real interest rate is the nominal rate minus the rate of inflation. To illustrate why this is important to an investor, I will provide a quick scenario. Say, an investor buys a bond that pays 5% simple interest plus the principle back to the investor after one year. If the investor payed 100 bucks for the bond, the investor would get 105 bucks a year later. The 5% is nominal interest. However, lets say the economy has been just booming the las couple of years and the inflation rate is 2% anually. This would mean the investor's 100 bucks at the end of the year would only buy him 98 bucks worth of stuff. So, the bond would actually only leave him with spending power of 103 bucks (105 interest and principle-2 inflation).The lesson here is that the investor must factor in the inflation rate when he or she makes an investment decision, because the real (again no pun intended) interest rate is much less (Real: 3%) than the nominal interest rate. To put it succinctly, the real interest rate is what you are actually getting from the investment after inflation is factored in.