Real Interest Rate

Filed Under » ,
Dictionary Says

Definition of 'Real Interest Rate'

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)
Investopedia Says

Investopedia explains '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.

Related Definitions

  •

    Inflation

    The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with ...
    Read More »

  • Interest Rate

    The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual ...
    Read More »

  • Nominal Interest Rate

    Nominal interest rates refer to referes to the rate of interest prior to taking inflation into account. Depending on its application, an inflation and risk premium must be added to the ...
    Read More »

    • Real Rate Of Return

      The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of ...
      Read More »

    • Return

      The gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment. It is usually quoted as a percentage.
      Read More »

    • Nominal

      An unadjusted rate, value or change in value. This type of measure often reflects the current situation, such as the current price of a car, and doesn't make adjustments to reflect ...
      Read More »

    • Blended Rate

      1. An interest rate charged on a loan, which is in between a previous rate and the new rate. Blended rates are usually offered through the refinancing of previous loans, and charge a ...
      Read More »

    • Gross Interest

      The annual rate of interest to be paid on an investment, security or deposit account before taxes or other charges are deducted. Gross interest is the interest bondholders receive from ...
      Read More »

    • Stated Annual Interest Rate

      The return on an investment that is expressed as a per-year percentage, and that does not account for compounding that occurs throughout the year. The effective annual interest rate, on ...
      Read More »

Articles Of Interest

Sponsored links
Hot Definitions
Partner Links
Suggested Definitions