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?
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How were nominal interest rates in the economy set before the Federal Reserve?
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What does the Fisher Effect say about nominal interest rates?
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Is the nominal value of a security ever also the real value?
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At yearend 2004, the Federal Reserve reported moderate economic growth of 3% ... ...
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