A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor.
The real interest rate gives investors a better idea of the rate at which their purchasing power increases or decreases.
Formula to calculate real interest rate.
Nominal interest rate refers to the interest rate before taking inflation into account.
Inflation is the long term rise in the prices of goods and services caused by the devaluation of currency
Suppose a certain economy’s nominal interest rate was 14% and its inflation rate was 5%. Calculate the real interest rate.
Therefore, the real interest rate is 9%.