What is a 'Real Interest Rate'
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. The real interest rate of an investment is calculated as the amount by which the nominal interest rate is higher than the inflation rate.
Real Interest Rate = Nominal Interest Rate  Inflation (Expected or Actual)
BREAKING DOWN 'Real Interest Rate'
The real interest rate is the growth rate of purchasing power derived from an investment. By adjusting the nominal interest rate to compensate for inflation, you are keeping the purchasing power of a given level of capital constant over time.
For example, if you are earning 4% interest per year on the savings in your bank account, and inflation is currently 3% per year, then the real interest rate you are receiving is 1% (4%  3% = 1%). The real value of your savings will only increase by 1% per year, when purchasing power is taken into consideration.

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What is the difference between real and nominal interest rates?
Learn what nominal interest rates and real interest rates are, how real interest rate takes into account the inflation rate, ... Read Answer >> 
How does the Fisher effect illustrate returns on bonds?
Learn how the Fisher effect shows the impact of expected future increases in inflation on the prices of bonds and their interest ... Read Answer >> 
How do nominal interest rates in finance differ from the nominal rate of interest ...
Read about the subtle difference between a financial instrument's nominal interest rate of return and the general nominal ... Read Answer >> 
What is the rationale behind the effective interest rate?
Read about the reasons why market actors identify the effective interest rate as it pertains to investing, lending and accounting. Read Answer >> 
How were nominal interest rates in the economy set before the Federal Reserve?
Learn more about how nominal interest rates are determined, how the Federal Reserve targets them, and how they acted prior ... Read Answer >> 
How does inflation affect fixedincome investments?
Learn about the ways inflation can harm fixedincome investments. Find out how to monitor the impact of inflation using common ... Read Answer >>