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Real value takes into account inflation and the value of an asset in relation to its purchasing power. In macroeconomics, the real gross domestic product compensates for inflation so economists can exclude inflation from growth figures, and see how much an economy actually grows. Nominal GDP would include inflation, and thus be higher.
When the inflation rate is low, the real interest rate is approximately given by the nominal interest rate minus the inflation rate, i.e., r ≈ R − i {\displaystyle r\approx R-i\,} In this analysis, the nominal rate is the stated rate, and the real interest rate is the interest after the expected losses due to inflation.
The Fisher equation can be used in the analysis of bonds.The real return on a bond is roughly equivalent to the nominal interest rate minus the expected inflation rate. But if actual inflation exceeds expected inflation during the life of the bond, the bondholder's real return will suffer.
For example, if the inflation rate is 5%, on a one-year loan of $1,000 with an 8% nominal interest rate the real interest rate would be 8% minus 5% or 3%. The real interest rate will usually be ...
For instance, if a loan offers a 4% nominal interest rate and inflation is 2%, the real interest rate is approximately 2%. The world of finance has a somewhat different definition.
In the case of contracts stated in terms of the nominal interest rate, the real interest rate is known only at the end of the period of the loan, based on the realized inflation rate; this is called the ex-post real interest rate. Since the introduction of inflation-indexed bonds, ex-ante real interest rates have become observable. [2]
With inflation hitting a 40-year high and gas breaking $5 a gallon, all eyes are on the Fed ahead of Wednesday’s Federal Open Market Committee (FOMC) meeting. ... ‘The real question’ about ...
In other words, the real interest rate is the nominal interest rate adjusted for the effect of inflation on the purchasing power of the outstanding loan. The relation between nominal and real interest rates, and inflation, is approximately given by the Fisher equation :