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Real interest rate = nominal interest rate - rate of inflation (expected or actual). A real interest rate equals the observed market interest rate adjusted for the effects of...
If you would like to know how changes in the price level affect the real value of the interest you receive or pay, the real interest rate calculator will help you to compute and understand its concept. Below, we explain how to calculate the real interest rate, which is defined by the Fisher equation, a formula for real interest rates.
The Real Interest Rate formula refers to the mathematical equation or expression that helps calculates the interest rate after excluding the impact of inflation. It provides a means to measure inflation-adjusted return on investments in financial security or a loan or deposits.
What is the Real Interest Rate Formula? The term “real interest rate” refers to the interest rate that has been adjusted by removing the effect of inflation from the nominal interest rate. In other words, it is effectively the actual cost of debt for the borrower or actual yield for the lender.
The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.
The real interest rate formula incorporates the nominal interest rate and the inflation rate. By subtracting the inflation rate from the nominal interest rate, we arrive at the real interest rate. This formula allows us to quantify the true rate of return or cost of borrowing.
A real interest rate is an inflation-adjusted interest rate. Let's say John Doe has a bond from Company XYZ that pays a 4% coupon. If the inflation rate is 3% per year, then the value of that coupon is 4% - 3% = 1%. In many cases, the real interest rates on savings accounts are negative.